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April 24, 2024

SFDR uncertainty likely to limit increase in Article 8 funds in 2024, says Fitch

Under the SFDR, Article 8 funds must promote environmental and social characteristics, while Article 6 funds do not need to build sustainability into their investment approaches © Chris J Ratcliffe/Bloomberg
Under the SFDR, Article 8 funds must promote environmental and social characteristics, while Article 6 funds do not need to build sustainability into their investment approaches © Chris J Ratcliffe/Bloomberg

Market uncertainty and the conversion of many Article 6 funds to Article 8 status may limit further upgrades or fund launches, says rating agency Fitch

Fears about misinterpreting rules designed to prevent the greenwashing of European funds are likely to constrain the introduction of new Article 8 funds under the EU’s Sustainable Finance Disclosure Regulation this year, says rating agency Fitch.

Under the SFDR, Article 8 funds must promote environmental and social characteristics, while Article 6 funds do not need to build sustainability into their investment approaches. The regime came into force in 2021 and applies to all financial market participants and advisers based in the EU.

The SFDR has been dogged by uncertainty over the application of its rules. Funds have been downgraded from Article 9 status, which covers funds that invest specifically in sustainable assets, over greenwashing fears. 

The European Commission consulted in 2023 on revamping the regime, and is considering whether to replace the articles with more precise categories. More than 80 per cent of respondents to the consultation “totally or mostly agree that SFDR’s ‘sustainable investment’ requirements are not sufficiently clear”, Fitch highlights in a report.

The agency says market uncertainty over the regime is likely to lead fund managers to exercise caution over whether to upgrade funds from Article 6 to Article 8 this year, and whether to launch new Article 8 funds. Reputational risk and fines may deter managers, it says.

Fitch adds that many funds have already switched from Article 6 to Article 8, limiting scope for more upgrades. 

The proportion of European money market funds’ assets under management categorised as Article 8 increased to 74 per cent from 56 per cent at the end of 2022, Fitch says, which it believes reflects “investor demand and the reclassification of funds” from Article 6. 

You can find the full report here.

A service from the Financial Times