European funds may reverse ESG downgrades

New guidance from the EU may lead to fund managers reversing recent downgrades of their ESG funds.

Recent downgrades have affected EUR 76.3 billion of European funds in recent months after many funds lost the EU’s highest fund sustainable accreditation last year. Article 9 of the Sustainable Finance Disclosure Regulation (SFDR) is designed to minimise greenwashing but the new clarification suggests funds will have more discretion in describing what they consider to be sustainable or high quality ESG.

Many previous Article 9 funds have been reclassified as Article 8 but the European Commission now says that many of the downgrades were not necessary. In a statement, the EC said investments “that have an objective of reduction in carbon emissions can therefore fall within the scope” of Article 9. This applies to both active and passive strategies.