Asset owners step up scrutiny of SFDR fund downgrades

Barclays says some RFPs include 'greenwashing' sections asking about fund downgrades as it predicts more attention on Article 9 passives.

Some asset owners are including ‘greenwashing’ sections in their RFPs, including queries about whether a manager has downgraded any of its funds under the EU’s Sustainable Finance Disclosure Regulation, according to a new report from Barclays.

In the latest edition of its SFDR tracker, the UK bank said it had heard anecdotally that some RFPs were questioning asset managers on their downgrades. At the same time, it predicted a rise in downgrades as funds begin to report additional information as part of Level 2 disclosure requirements.

Using Morningstar data from between April and August this year, Barclays found 25 funds that have downgraded from Article 9 to Article 8 from seven managers, and 16 funds from 12 managers that dropped from Article 8 to Article 6.

Article 9 funds – often referred to as “dark green” funds – explicitly seek to achieve sustainable goals, while Article 8 funds promote environmental or social characteristics but these are not their overarching objective.

Barclays said that at present “there is little consensus over what ‘good’, or even ‘acceptable’, looks like in terms of sustainable investment allocations, PAI indicator numbers or taxonomy alignment”. As these begin to be reported more widely, it continued, some funds may find themselves in the bottom percentile of peers, leading to scrutiny from end investors and consultants.

In a quarterly report issued at the end of July, Morningstar found 16 funds that had dropped from Article 9 to Article 8. NN IP and PIMCO accounted for most of these, dropping 10 and four funds respectively. NN IP said the changes were based on clarification from European regulators, which had not been given when the initial classification was made. Neither NN IP nor PIMCO changed the investment strategy of the funds. There is no suggestion that either manager was greenwashing in their initial classification choices.

Hortense Bioy, head of sustainability research at Morningstar, said at the time that further downgrades were likely as the exact requirements of Article 9 funds became more clear. She highlighted passive funds tracking a climate benchmark as a segment to watch.

Barclays also said it expected to see more scrutiny of passive Article 9 funds, adding that it was “surprised” to see that 13 percent of passively managed equity funds in its research universe were classified as Article 9, versus “only a handful” of passive credit funds.

Growing PAIns

In a separate piece of research published today, Barclays also warned that reporting on principle adverse impacts (PAIs) would be the most challenging aspects of the Level 2 reporting requirements. These will oblige many funds to report on additional data points, including PAIs, taxonomy-alignment and allocations to sustainable investments.

The EU has set out 18 mandatory indicators including emissions, negative biodiversity impacts and UN Global Compact violations, as well as 46 voluntary indicators.

However, Barclays warned that investors face a number of challenges when reporting on their PAIs, including availability of raw data, working out what a “good” or “acceptable” level is for individual PAI metrics, and the possibility of being compared to peers and even subjected to allegations of greenwashing if they perform poorly against other funds.