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Article 8+ fund managers will win market share – be prepared.

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Article 8+ funds will win market share from Article 8 funds and fund managers should be prepared for the transition.

This was the forecast we came to at the start of this year – and with the changes proposed by the ESMA in April, this argument seems to be getting even stronger.

We explain exactly what an Article 8+ fund is below, and what fund managers can do to ensure they are best prepared to fit into this currently unofficial classification :

What exactly is Article 8+?

Article 8+ is not an official classification, but it is increasingly being used by institutional investors (Asset Owners and LPs) to describe a fund that is at least partly invested in sustainable assets, and can demonstrate this by reporting on the Principal Adverse Indicators (PAIs).

But isn’t that just an Article 8 fund?

Under Article 8, a fund can declare itself to be ‘promoting environmental and social characteristics’ but ‘not making any sustainable investments’. It is a box that a huge number of funds are now checking.

Why are fund managers choosing to do this?

It is in effect the loophole that allows them to avoid reporting to the 14 mandatory PAIs, which we do acknowledge, is a headache.

But this loophole brings with it three significant problems:

  1. It’s an oxymoron.

“Please regard me as a sustainable fund… but I don’t actually make any sustainable investments” – it goes without saying that this approach is losing credibility with investors.

  1. It is possible that new guidance from the European regulator (ESMA) will close this loophole later this year.

Consider how recent ‘clarification’ guidance from ESMA late last year led to a huge numbers of funds dropping their Article 9 classification.

  1. The fund will still need to set out what ‘environmental and social characteristics’ it promotes, and what ‘indicators’ are used to measure these characteristics.

So if the fund doesn’t report to the PAIs, it will need to devise and measure alternative indicators.

So what do we think?

As we predicted, the difference between an Article 8 and an Article 8+ fund is becoming foregrounded this year.

Investors are aware that >50% of all European funds (by value) are already classifying itself as ‘Article 8’, but trying its utmost to avoid reporting any sustainability indicators – and investors are no longer satisfied with this.

So for fund managers, is there a work around this? No – they simply must begin reporting to the 14 mandatory PAIs set out by SFDR.