Despite macroeconomic pressures such as rising interest rates and inflation, article 8 funds--those that promote environmental and/or social characteristics--continued their recovery during the first quarter of 2023, bringing in €25.4bn of net new money. This is more than double the €12.2bn of inflows in Q4 of 2022, said Morningstar.

But following a flurry of fund downgrades amongst unclear criteria, article 9 funds--which have a sustainable investment objective--gathered only €4bn in the first quarter of 2023.

“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,” said Hortense Bioy, global director of sustainability research at Morningstar. “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.”

Here are some key takeaways from the report.

€25.4bn for article 8 funds, €4bn for article 9

Article 8 funds pulled in €25.4bn of net new money despite continued macroeconomic pressures, while article 9 funds only attracted €4bn of fresh capital in the first quarter for 2023. Article 6 funds saw net inflow of €24.8bn, a contrast to the outflows they saw in Q2, Q3 and Q4 of 2022.

The report noted that article 9 funds saw their lowest inflows since SFDR was introduced in March 2021. Many funds were reclassified last year, after the European Securities and Markets Authority (Esma) specified that article 9 funds “should hold only sustainable investments, except for cash and assets used for hedging purposes,” said Morningstar.

This, together with a lack of clarity on sustainability terminology, saw many funds voluntarily downgraded. “Loose definitions” can lead to discrepancies in classification, funds being marketed as more sustainable than they are, and even greenwashing, so fund managers seemed to prefer to “play it safe,” said .

Fewer fund downgrades

Morningstar found that nearly 300 products changed SFDR status since its January review. Most of these changes were were upgrades: 263 funds upgraded from article 6 to 8, two upgraded  from article 6 to 9, and eight moved from article 8 to 9.

Fourteen funds were downgraded to article 8 from 9, a significant decrease compared to the , while seven funds moved from article 8 to article 6.

Article 8 and 9 fund assets up to €4.9trn

Assets in article 8 and article 9 funds increased by 3.4% in the first quarter of 2023 to reach €4.9trn, up from €4.7trn at the end of 2022, thanks to newly launched funds, products reclassified from article 6 to article 8 and market appreciation, found the report.

As of March 2023, article 8 and 9 funds now account for a “record” 57% of the overall EU fund universe, said Morningstar. This is up from 55.9% the previous quarter.

There are now 887 funds classified as article 9 and 9,934 funds classified as article 8.

Drop in number of fund launches

Only a total of 145 article 8 and 9 funds were launched in Q1 2023. 128 of these were article 8 funds, while 17 were article 9 funds. This is a historical low, and a decline from the 260 article 8 and 9 fund launches in Q4 2022. Morningstar did note, however, that while the first quarter number may be restated in future reports as more launches are identified and reported, it expects it to “remain below the historical trend.”

Only 6% of new fund launches were for article 9 funds and 44% were for article 8 funds.

The decline in new products is partly due to dampened overall market sentiment--article 6 fund launches also saw a drop in the first quarter--as well as greenwashing accusations and evolving regulation, said Morningstar.

Find the full SFDR Article 8 and Article 9 Funds: Q1 2023 in Review report published by Morningstar .