Investment strategies labeled as ESG-linked under the European Union's Article 8 criteria registered their largest quarterly outflows on record, while the strictest category of Article 9 funds saw their first quarterly outflows in the fourth quarter of 2023.
Data compiled by Morningstar showed the drop was due to persistent macroeconomic pressures and waning investor appetite for environmental, social and governance products that are categorized under the Sustainable Finance Disclosure Regulation.
Morningstar said investors instead favored government bonds — an area that it said had limited ESG products.
Investors pulled a net €26.7 billion ($29.2 billion) from Article 8 funds in the final quarter of last year, having seen €21 billion of outflows in the third quarter. Article 9 funds saw net outflows of €4.7 billion for the fourth quarter, and showed net inflows of €100 million in the third quarter.
Article 6 funds, which have no ESG criteria, attracted €15.7 billion of net inflows in the fourth quarter.
Together, Article 8 and Article 9 funds saw their market share climb further to nearly 60% of the EU universe, primarily due to continued reclassification from Article 6 to Article 8 or 9. Assets in Article 8 and Article 9 funds actually rose by 1.7% over the quarter to a new record of €5.2 trillion, due to these reclassifcations and stock and bond price appreciation.
Morningstar identified 256 funds that altered their SFDR status in the fourth quarter, including 218 that upgraded to Article 8 from Article 6, while only four funds downgraded to Article 8 from Article 9.