The European Fund and Asset Management Association (Efama) has that article 9 funds--investment products under the EU’s sustainable finance disclosure regulation (SFDR) that have an explicit sustainability objective and invest in assets that contribute to environmental or social goals--experienced net outflows in 2024. This marks a shift in the market dynamics for sustainable investment products. According to the trade association, these outflows were primarily driven by the high proportion of non-ETF equity funds in the article 9 category, which faced significant sell-offs as investors shifted their focus to exchange-traded funds (ETFs). Luxembourg, a leading domicile for sustainable funds in Europe (with 54% of total article 9 fund assets), also saw pressure in this segment, reflecting broader European trends.
Article 9 fund market overview
At the end of 2024, the net assets of article 9 funds amounted to €353bn, or approximately 2% of the European fund market. This was a decline of 3.3% compared to the end of 2023, continuing a steady reduction in the market share of article 9 funds from just under 3% in Q2 2022. The largest drop in net assets occurred in the second half of 2022, following a wave of reclassifications from article 9 to article 8 funds. Morningstar identified about 350 article 9 funds that were downgraded to article 8 in response to a clarification from the European Securities and Markets Authority in June 2022, Efama noted. This clarification, stemming from the European Commission’s July 2021 recommendation, specified that the portfolio of article 9 funds should consist exclusively of sustainable investments. This led to the reclassification of many funds that were previously considered article 9 due to their small allocation to non-sustainable investments.
Luxembourg was significantly affected by this wave of reclassifications, given that a large number of article 9 funds are domiciled in the grand duchy. The country's role as a key hub for ESG-labelled funds made it particularly exposed to shifts in regulatory interpretations.
Prior to this clarification, many funds operated under the assumption that a small portion of their portfolios could be invested in non-sustainable assets. However, the new interpretation mandated that the entire portfolio of article 9 funds must be invested in sustainable assets, leading to the reclassification of many funds that did not meet this strict criterion.
Equity funds
The breakdown of article 9 funds by type shows that equity funds dominated the SFDR article 9 fund market, accounting for nearly 60% of the total at the end of 2024. This was almost double the share of equity funds in article 8 funds (37%) and significantly higher than in article 6 funds. Bond funds accounted for 21% of article 9 funds, in line with their share in other SFDR fund categories. Other types of article 9 funds, such as multi-asset funds, and especially money market funds (MMFs), held significantly smaller market shares.
Market performance
Net assets for article 9 funds stayed broadly stable for much of 2024, but their market share continued to decline. This decline was primarily caused by negative net sales and a small number of reclassifications. Although the net assets of article 9 funds showed some improvement in 2023, driven by a rise in stock and bond markets, the overall market share continued to decrease as investors moved towards ETFs and other more liquid investment options.
Need for SFDR review
Efama suggested that the upcoming review of the SFDR presents a crucial opportunity to enhance the framework and make sustainable investing more accessible and appealing to investors. The report stressed the need for increased transparency and better alignment of the SFDR with the broader EU sustainable finance framework, including corporate sustainability reporting under the corporate sustainability reporting directive (CSRD) and investor sustainability preferences as defined in the markets in financial instruments directive (Mifid) and the insurance distribution directive (IDD). Efama also recommended that before any changes to the SFDR are implemented, a thorough market impact analysis be conducted, focusing on whether amendments would improve consumer protection, foster product innovation and accommodate the diversity of existing environmental, social and governance strategies.