The upheaval last year led investors and regulators alike to question the basic construction of the environmental, social and governance investing rulebook that Europe enforced more than two years ago. The Sustainable Finance Disclosure Regulation, which EU officials had hoped would serve as a global standard, has undergone a series of updates since its enforcement to address a seemingly endless list of shortcomings.
"Some market participants will think this is a complete circus," Bioy said. It's not clear why the EU Commission needed to "wait so long to clarify" fundamental questions around Article 9.
Last year's downgrades, which led BlackRock, Amundi and many others to reclassify their Article 9 funds under a weaker ESG designation known as Article 8, disproportionately affected passive strategies. The confusion set in last year as the market and even regulators struggled to interpret existing rules.
Passive funds that went from Article 9 to Article 8 because they tracked Paris-aligned benchmarks and climate-transition benchmarks now "may be required to be reclassified as Article 9," Ms. Bioy said.
In a report published late January, Morningstar estimated that 90% of downgraded Article 9 assets comprised equity strategies, almost half of which tracked Paris-aligned and climate-transition benchmarks.
In its new guidance, published on Friday, the EU Commission said SFDR is "neutral" when it comes to financial product design, and that investments "that have an objective of reduction in carbon emissions can therefore fall within the scope" of Article 9. That applies "whether they use a passive or active investment strategy," it said.
The EU Commission's latest clarifications also seek to address the long-outstanding issue of how to define a sustainable investment. The EU's failure to date to provide clear parameters around such a key ESG concept has drawn criticism amid concerns of greenwashing.
The Commission said it won't impose minimum thresholds and instead leave it to market participants to demonstrate that their claims are fair. At the same time, it warned that the disclosure framework requires "increased responsibility" on the part of market participants.
But that could end up being costly for clients.
"For investors, the lack of explicit regulatory standards increases the time and effort required to identify financial products that both meet their sustainability preferences and protect them from greenwashing," Stephan Kippe, an analyst at Commerzbank Research, said in a note.
"In principle, we view the Commission's clarifications as positive," he said. "But they still fail to address significant fundamental flaws in the basic structure of the SFDR regime."