Investors pull €1.8bn from BlackRock green bond fund, Article 8 funds suffer net outflows

Inflows in Article 8 and Article 9 funds plummet by 94% in Q1 amid ‘challenging macroeconomic backdrop’.

“Dark green” investment funds have proven more resilient than their lighter-shaded counterparts, according to data on EU funds from Morningstar. The data provider revealed that Article 9 funds saw inflows of €8.6 billion in the first quarter of 2022, while Article 8 ones saw outflows of €3.3 billion over the same period.

One of the biggest losers, however, was an Article 9 green bond fund run by BlackRock, from which investors pulled nearly €1.8 billion over the quarter.

Under the EU’s Sustainable Finance Disclosure Regulation (SFDR), the anti-greenwashing legislation brought in last year, Article 9 funds – often referred to as dark green – are defined as those with a sustainable investment objective. Article 8 funds less actively promote environmental and/or social characteristics and, as a result, are often called “light green” funds.  

Overall, Morningstar reported that Article 8 and Article 9 funds grew by 8.5 percent to €4 trillion in Q1, despite “the challenging macroeconomic backdrop of inflationary pressures, geopolitical risks and market volatility”.  

Inflows into these funds, however, declined by 94 percent in Q1 compared to the previous quarter, which saw €94.1 billion in new investments. By contrast, Morningstar reported that Article 6 funds – which have no sustainability pretensions – saw a comparatively smaller drop in inflows of 79 percent in Q1.

On the relative resilience of Article 9 funds over Article 8 ones, Morningstar suggested that it could be down to former’s lower “exposure to hard-hit fixed-income funds”.

Not all Article 9 funds have escaped turbulence, with €1.8 billion around two thirds of its assets flowing out BlackRock’s Article 9 iShares Green Bond Index fund in Q1. The index tracked by the vehicle skews towards longer durations due to the high prevalence of sovereign green bonds, and thus was badly affected by investors switching to shorter duration products. Article 9 funds from Candriam, BNP Paribas and Pictet have all seen outflows of more than €300 million this quarter.

Morningstar’s data also revealed that Article 8 and 9 funds now account for a larger share of the EU fund universe in terms of assets, rising to 45.6 percent at the end of March, up from 42.4 percent three months earlier. 

It was also revealed that the number of Article 8 and 9 funds under development fell by almost half in the first quarter, with an estimated 138 new launches.  

Of new funds launched in the EU during this period, 47 percent were Article 8 or 9. Amundi, JPMorgan and Nordea were the top three providers of Article 8 funds and BlackRock, Pictet and BNP Paribas the same for Article 9 funds. 

“After strong inflows in 2021, it’s the so-called ‘light green’ (Article 8) funds that suffered the most from the challenging market environment in Q1, as they recorded outflows,” said Hortense Bioy, Morningstar’s global director of sustainability research. “The so-called ‘dark green’ (Article 9) funds proved more resilient by registering inflows.” 

Investor preference for relatively greener funds was also proven by the positive flows into the Article 8 funds which survived Morningstar’s recent purge, when it culled more than 1,200 funds with around $1.2 trillion in assets from its European sustainable funds list after tightening the criteria for inclusion.

Outflows are also not necessarily moving away from sustainable investments. Responsible Investor understands that half of the roughly €900 million lost by an Article 8 ESG-screened exchange-traded fund run by BlackRock came from a client switching to a stricter Paris-aligned vehicle.

It was reported in Bloomberg last week that Morningstar is also upping its quality control of ESG funds, with Bioy stating that fund managers interviewed by firm in connection with ESG controls can expect to be challenged further.     

Additional reporting by Dominic Webb.