On February 13, the Autorité des marchés financiers (AMF), the French financial regulator, proposed the introduction of legislation to establish “minimum environmental requirements” that must be met in order for financial products to be classified as Article 8 or Article 9 under the Sustainable Finance Disclosure Regulation (SFDR). The AMF explains that since the SFDR “does not impose minimum requirements and does not define the concept of sustainable investment . . . the current Article 8 and Article 9 classification does not aim to assess the nature or extent of the manager's commitment to sustainability.”
As defined in the SFDR, Article 8 funds are those that promote Environmental or Social characteristics but do not have them as the overarching objective. Article 9 funds are those that have specific sustainable goals as their objective.
The AMF proposes that, “in order to avoid . . . ambiguity and to better meet the expectations of savers,” the European Commission introduce minimum criteria concerning environmental impacts for products categorized under Articles 8 or 9. It suggests the following recommendations:
- Minimum environmental criteria should be established for the classification of products as Article 9 or Article 8. Compliance with these criteria would be subject to national supervision. The criteria for Article 9 should continue to be more stringent than those for Article 8.
- A minimum proportion of portfolio assets for Article 9 funds should consist of investments aligned with the Taxonomy. This percentage could increase over time as the European economy advances towards sustainability.
- Financial market participants that manage Article 8 and 9 funds should adopt a binding ESG approach in their investment decision-making process. The EU framework for minimum criteria should identify a set of acceptable ESG approaches that can be implemented by financial players.
- Article 9 funds should exclude investments in fossil fuel activities that are not aligned with the European Taxonomy. Investment in such activities would be possible for Article 8 products provided that they meet strict conditions that ensure that these activities are engaged in an orderly transition.
The SFDR recently received criticism from some European asset managers for its lack of clarity and precision. This uncertainty has led to a number of asset managers announcing that they are downgrading ESG funds from Article 9 to the less restrictive Article 8. In the fourth quarter of 2022, asset managers downgraded funds totaling 175 billion euros ($187 billion) of assets from Article 9 to Article 8. In this same vein, in a response to a call for evidence on greenwashing by the European Securities and Markets Authority (ESMA), the Securities and Markets Stakeholder Group (SMSG) recommended further clarification of what qualifies for Article 8 and Article 9 fund classification under the SFDR.
Taking the Temperature: The perceived lack of precision on what constitutes a suitable Article 9 investment – i.e., those that have specific sustainable goals as their objective – remains a major concern for asset managers. Funds are, understandably, hesitant to make sustainability-related claims or agree to strict criteria, such as the Article 9 classification, without clarity as to what constitutes a sustainable investment due to a risk of greenwashing challenges. This has not stopped all asset managers from establishing Article 9 funds. For example, Goldman Sachs recently announced that it had closed over $1.6 billion in funding for its Article 9 Horizon Environment & Climate Solutions I fund.