Nordea downgrade reveals inconsistency in SFDR classification of DE&I funds

Gender fund downgrades from Article 9 as market participants flag issues with diversity strategies.

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Nordea Asset Management (NAM) has expanded the investment universe of its Global Gender Diversity Fund to focus on engagement and other DE&I factors, but the resulting downgrade from Article 9 reveals uncertainty about the classification of these thematic funds under SFDR.

While the Global Diversity Engagement Fund – changes to which will become effective as of 31 August – has been downgraded to Article 8 from Article 9 under the SFDR, NAM has committed to maintaining a minimum proportion of 50 percent of the fund in sustainable investments. This is a decline from an 85 percent commitment made in disclosures last year.

Nordea said the decision to broaden the investment universe had been made in response to “societal demands for change to improving diversity and inclusion beyond just gender representation”.

It added that the new strategy aims to capture a broader range of companies in the early stages of their DE&I development. “The investment process will stay the same, but engagement with investee companies will become a core component of the strategy.”

The fund’s top five holdings are currently Microsoft, Apple, Nvidia, Eli Lilly and Novo Nordisk. Only two of the top 15 holdings are non-US companies.

NAM declined to provide further detail on the reasons for the shift, the future stewardship direction, or the downgrade from Article 9.

Diversity funds

Nordea’s fund is part of a small universe of diversity funds subject to SFDR.

Alliance Bernstein, M&G and Fineco Asset Management have Article 9 diversity funds, while Germany’s Ampega, Italy’s Anima, Lyxor and UBS have Article 8 funds. The two latter are ETFs tracking Solactive Equileap indexes.

They are joined at Article 6 level by a BNP Paribas gender equality fund and an iShares inclusion and diversity ETF, which was downgraded from Article 8 last year.

Some of the funds have also attracted substantial investment. The UBS ETF has €745 million in assets and the Nordea fund has €250 million.

However, Morningstar’s director of investment stewardship and research, Lindsey Stewart told Responsible Investor that SFDR “doesn’t really lend itself all that well to tackling issues outside of climate and environment”.

“Only a couple of principal adverse impact (PAI) indicators are directly related, and they’re both on gender equity,” he said. Funds are required to report the average gender pay gap and percentage of female board members at investee companies.

“We’ve seen some disclosures from managers on how they’re addressing those PAIs,” Steward added, “but without a wider framework or a social taxonomy, it is difficult for managers to decide exactly where they should place their funds, because they have to be very specific about metrics and intentions on how they’re classifying these funds”.

Anders Rodenberg, CEO of DE&I data provider Denominator, added that diversity funds do not necessarily perform equally well on different diversity metrics.

“The problem with some diversity funds is they are often good performers on gender, but not necessarily on all other diversity metrics,” he said. “Calling a strategy a diversity fund if it’s mainly a gender fund goes into the dangerous territory of mislabelling.”

He added: “Within the industry, we’ve seen gender funds which are good performers on gender, but when you look at their performance on race and ethnicity, or other DE&I metrics, you find bottom quartile or below average performance.”

DE&I engagement

Stewart said that DE&I engagement should follow the template of any environmental stewardship programme.

“There’s a need to demonstrate why the issue is financially material,” he said. “It’s a case of setting what objectives you want to achieve, what milestones you want to hit, which companies you’ll be targeting, and really demonstrating that companies are moving towards the outcome that you’re seeking or escalating by voting against responsible directors or possibly reducing stake or exiting.”

He added that in different jurisdictions, different aspects of diversity will inevitably attract varying degrees of attention.

“Because of the legacy of racial equity issues in the US, there’s a lot more focus on both gender and race,” he said. “In terms of European proxy voting activity and engagement, there is not so much focus on anything outside of gender due to data restrictions.”