The strictest category of so-called green funds under European Union sustainability rules attracted the lowest inflows on record in the first quarter, largely due to a recent wave of downgrades of such strategies, Morningstar said in a report.
Funds classified as Article 9 — those that target sustainable investments — added €4 billion ($4.4 billion) in the first quarter, vs. €6.2 billion for the previous quarter, according to Morningstar's latest report, SFDR Article 8 and 9 Funds: Q1 2023 in Review.
Article 8 funds, which promote environmental or social characteristics, pulled in €25.4 billion in net new money in the first quarter, vs. €12.2 billion in the previous quarter.
Total assets in Articles 8 and 9 funds increased by 4.3% to €4.9 trillion as of March 31.
Morningstar primarily attributed the low inflows for Article 9 funds to clarification by regulators on what assets were acceptable in these strategies. Further SFDR rules were also introduced in January, with more disclosure requirements.
Ahead of the upgraded disclosure requirements and new regulatory guidance, money managers reviewed their SFDR classifications and downgraded more than 300 Article 9 funds to Article 8, the report said.
However, Morningstar said the flood of downgrades to Article 8 had stemmed, with about a dozen moving from Article 9 classification in the first quarter.
SFDR also allows for Article 6 funds — which have no sustainability objectives. Morningstar said that 260 strategies were upgraded to Article 8 from Article 6 in the first quarter.
"Just over two years after SFDR came into force, the landscape of Article 8 and Article 9 funds continues to evolve amid persistent greenwashing concerns and regulatory uncertainty," Hortense Bioy, global director of sustainability research at Morningstar, said in a news release accompanying the report.
"The wave of Article 9 downgrades may be over, but the recent clarifications from the European Commission on specific aspects of SFDR may result in further reclassifications. In this context and given the flexibility afforded to asset managers in assessing the proportion of sustainable investments in their products, investors should remain prudent and do proper due diligence. The commission's clarifications serve as a reminder that SFDR is a disclosure regime, and that Article 8 and Article 9 shouldn't be used as labels," she said.