The Great Reclassification: How SFDR Is Changing Funds

Over the past three months, asset managers have continued to enhance existing strategies, reclassify funds, and launch new ones meeting Article 8 or Article 9 requirements

Hortense Bioy, CFA 15 November, 2021 | 12:44AM
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Pencils of a variety of colours

It's been eight months since the European Union (EU) set phase one of its Sustainable Finance Disclosure Regulation (SFDR) in motion requiring asset management firms to classify their funds into one of three categories, Article 6, Article 8, or Article 9, based on the products' sustainability objective.

We previously reported in SFDR: The First 20 Days and SFDR: Four Months On that asset managers have taken different interpretations of Article 8 and Article 9 definitions, with some opting for a softer approach than others. This has resulted in an unexpectedly high number and broad range of products classified as Article 8 (light green) and Article 9 (dark green).

At the end of September, 21.7% of funds available for sale in the EU** reported to “promote environmental and/or social characteristics’ (Article 8), while 2.8% claimed to have ‘a sustainable objective” (Article 9). Combined, the two categories represented close to a quarter of the overall EU fund universe.

In terms of assets, the two fund groups accounted for a bigger share of the EU universe: almost 37%, representing combined assets under management of EUR 3.32 trillion, excluding money market funds, feeder funds, and funds of funds.

Driven by the increased investor interest in sustainability issues and higher number of options available, inflows into Article 8 and Article 9 products accelerated in the third quarter of 2021, capturing almost 57% of the reviewed fund universe's total inflows. This compares with 44% in the second quarter.

Over the past three months, asset managers continued to enhance existing strategies, reclassify funds, and launch new ones that meet Article 8 or Article 9 requirements amid intensifying pressure from distributors and fund buyers. As many as 50% of the new funds in our reviewed universe were launched as either Article 8 or Article 9 funds, up from 42% in the previous quarter.


Examples of Article 8 funds launched in the third quarter include JPM US Sustainable Equity, which takes a best-in-class approach and invests at least two thirds of its assets in US sustainable companies or companies with improving sustainable characteristics, and LUX IM ESG UBS Global Climate Change, which invests in companies that contribute and/or benefit from a reduction in carbon emissions. Meanwhile, Xtrackers, DWS' exchange-traded funds (ETF) arm, converted nine Europe sector ETFs into Article 8 ESG-screened sector ETFs.

Examples of Article 9 new fund launches include, which invests in US companies whose products and services contribute to positive environmental or social change and thereby have an impact on the development of a sustainable global economy.

New fund Federated Hermes Climate Change High Yield Credit invests in the debt securities of companies that it believes will transition to a lower carbon world. The companies will either have strong or improving ESG characteristics.

**At the time of writing, Morningstar had collected SFDR Level 1 data on close to 87.6% of funds available for sale in the EU. All data in this article is based on Morningstar Direct fund data excluding money market funds, funds of funds, and feeder funds.

To check out the our full report on SFDR, click here

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
JPM US Sustainable Equity C Acc USD119.32 USD0.12

About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is global head of sustainability research at Morningstar

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