No impact on allocations from SFDR downgrades, says DWS

DWS saw no change in allocation to ESG funds that had been reclassified from Article 9 to Article 8, according to its head of ESG advisory.

Dennis Hänsel, who is responsible for ESG investment advice to the German manager’s institutional and large retail clients, told Responsible Investor that allocation or flows had not reduced after the downgrades.

Among the funds to lose their Article 9 status were five actively managed funds in DWS’s SDG range including its global equities fund, which had €1.6 billion at the time of the downgrade. Ten Paris-aligned Benchmark ETFs run by its Xtrackers division were also downgraded.

Hänsel said the decision to downgrade was driven by the European Commission’s indication that Article 9 funds would need a 100 percent share of sustainable investments.

On the equity side, DWS calculates this sustainability share on an activity basis. According to this assessment, fewer than 100 companies in the MSCI ACWI have a share above 85 percent.

With funds tracking Paris-aligned and Climate Transition Benchmarks, the manager took a “very conservative” approach, Hänsel said. “It was not possible even for these kinds of benchmarks [to have Article 9 status], because the sustainability share with our methodology is around 20 to 50 percent. It was clear that we downgrade or relabel.”

The three European supervisory authorities are awaiting clarification on whether funds that track a PAB or CTB can automatically be assumed to fulfil the requirements of Article 9 without also having 100 percent sustainable investments.

DWS’s only surviving Article 9 funds are its green bond range. Investments by these funds align with the relevant ICMA principles and issuers are subject to a Do No Significant Harm and a minimum safeguards test.

“Of course, the underlying assumption is that a green bond by definition has a sustainability share of 100 percent,” Hänsel added.

After the decision was made to downgrade, DWS communicated via product news to its distribution partners. Hänsel said the feedback “was even positive”, and there was no change in allocation to the funds as a result.

He suggested that the wider context of the downgrades, as well as the fact that no changes were made to the underlying fund strategies, had helped the reaction. The large SDG equity fund, for instance, still targets a minimum sustainability share of 50 percent – also in line with proposed ESMA guidelines on naming.

“In comparison to other decisions we’ve made, this was a very smooth approach. I believe it was driven by the environment where all the others also chose to go that way, and we observed a massive drop from Article 9 to Article 8 funds.”

The DWS downgrades took place in the middle of a wave of downgrades. In November, when the manager relabelled its funds, more than one in 10 Article 9 funds were downgraded.

Taxonomy troubles

Looking at EU regulation more broadly, DWS’s head of public affairs and regulatory strategy Stefan Marx predicted significant controversy when – or if – the proposed social taxonomy comes to be discussed.

The current status of the social taxonomy is unclear after reports in July last year that it had been “shelved indefinitely”.

Asked whether the taxonomy was dead, Marx replied: “It is not living, but that doesn’t mean it’s dead.”

He said it was clear that a social taxonomy would not come under the current European Commission, ie, before elections to the European Parliament next year, adding that it was “pretty clear that there are a lot of questions around whether it really makes sense”.

Marx acknowledged that clearer criteria on social factors would be useful. However, he said there could be intense debate around social factors when the discussion becomes more “value-laden”.

“If you think about issues like gender diversity it shouldn’t be too controversial, but LGBTQI+ rights some EU states might see differently,” he said. “Although it’s something we would find helpful, this can be a source of division if not carefully handled.

“Broadly, we need more definitive answers on how we can actually get to the ‘S’. On the other hand, we realise it’s not coming any time soon and it’s obviously something that needs to be carefully discussed.”

Asked which piece of non-European regulation he would point to as a good example, Marx said he found Singapore’s approach interesting.

“They took this approach of having a traffic light taxonomy of green, yellow and red areas,” he said. “Obviously, here we’re still struggling. We have a green taxonomy – but it’s not entirely green, just climate. We’re still discussing a social taxonomy, transition taxonomy and brown taxonomy.

“In Singapore, they managed to do it all in one go in a principles-based way, which is interesting to see.”