Introduction
This week’s post is shortish because I will publish a fuller subscriber only Watching Brief over the weekend or early next week.
The title refers to the categorisation of funds in Sustainability terms under the EU’s recently in force SFDR sustainable finance directive. Although the UK is not of course in the EU, all fund managers wanting to market funds in Europe (which includes all the large UK fund managers) will comply with the rules.
The categories
As usual with EU policy documents, the rules run to many pages, but for our purposes, we only really need to get used to the 3 ‘articles’ or categories of fund referenced in the title.
- Category 6 is general retail funds such as we might purchase
- Category 8 is funds that promote environmental or social characteristics (light green)
- Category 9 is funds that have a specific sustainable investment objective (darker green, but not necessarily ethical)
How are funds lining up so far?
Morningstar have published some early data from about half the funds with domicile in Luxembourg, the favourite base for non-European fund managers to use for selling into Europe, on how funds are coming out as the process gets under way.
It is probably a good idea to keep in mind that when any new rules are published, they are subject to varying intepretations, especially when talking about categorisations (think of Covid-19 death rates). So I would assume that some fund groups are going to be more liberal with the rules and others more literal, or pedantic.
It is no surprise that European groups as opposed to UK or US fund businesses are in the main showing a higher proportion of category 8 and 9 funds because it is well known that European investors have been more in favour of ESG filters for a while and one might also speculate that the European fund managers are a little cuter at tuning their documentation to fit in with EU rules – just my idea!
On this early data funds classified as Article 8 or 9 represent 21% of European funds by number and 25% of European assets. This data is extrapolated by Morningstar, rather prematurely in my opinion, to suggest that the ESG funds market in Europe is worth EUR 2,5 trillion. Not a trifling sum even in these days of money sloshing around everwhere.
In case you are interested the French firms Amundi and BNP Paribas have the highest number of funds in 8 or 9, well into the hundreds. The UK’s top player was Legal & General with around 50 funds and even the mighty Fidelity International only has just above 50.
When it comes to actual money invested, unsurprisingly, Nordic and Dutch asset managers fill all the top spaces. SEB, a Swedish bank that operates in my region classified 95% of its assets in categories 8 and 9. The bank I personally use, also Swedish, too small as a fund manager to make this survey, has 100% of its funds ESG assessed as far as I can tell – the facts sheets always include a significant ESG commentary.
Does this matter to us?
I think it does. I have been pretty sure for some time that the global enthusiasm for sticking a ‘sustainable’ label on investments and booing loudly everything that superficially is not sustainable will be the biggest driver of investment fund flows for years to come. So even if you are more sceptical than me about the quality of the labelling on ESG funds, it makes sense to to at least keep up with this bandwagon, even if you don’t want to jump on.
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