Executive Summary
Guidance published by the European Supervisory Authorities (ESAs) in May 2023, has clarified the position for active and passive Article 9 financial products using an EU Paris-aligned Benchmark (PAB) or an EU Climate Transition Benchmark (CTB). The pertinent regulatory guidance in the Q&As relating to Article 9 financial products was twofold.
- On Nov. 17, 2022, the ESAs clarified that when an Article 9 financial product has sustainable investment as its objective, the designated index that has been selected as a reference benchmark cannot be a broad market index. As of March 2023, there were nearly 900 Article 9 funds. If these funds are benchmarked against a broad market-cap-weighted index, they will need to take action and identify an “objective-aligned” benchmark (9.1) or a PAB (9.3), if they are to maintain their Article 9 status.
- On May 17, 2023, the ESAs stated that passive financial products that track a PAB or CTB are deemed to have a sustainable investment objective; therefore, such financial products can be categorized as Article 9.
The S&P PACTTM Indices (S&P Paris-Aligned & Climate Transition Indices) offer a broad, diversified, beta-like exposure. Importantly, the indices seek to eliminate exposure to significant fossil-fuel-based energy (as defined by the EU’s minimum standards for PABs in the Low Carbon Benchmark Regulation (LCBR)), overcoming the “tracking error lock” to fossil fuel energy and broad benchmarks if the broad market does not transition. In order to comply with the LCBR, the S&P Paris-Aligned Indices aim to incorporate the following climate objectives:
- To underweight or remove the Energy sector;
- To have defined net zero pathways;
- To reduce forward-looking transition and physical risks; and
- To address climate objectives and get ahead of emerging sustainability trends.
A similar framework is also utilized in our iBoxx EUR Corporates Net Zero 2050 Paris-Aligned ESG Index, with appropriate features for fixed income indices.
This paper provides an overview of the Article 9 fund market as it stands, insight into how the S&P Paris-Aligned Indices work and the exposures they exhibit from both climate and more traditional risk factor perspectives.
Article 9: Defined Inflows and Organic Growth
“Dark green” Article 9 funds have fared well relative to their “light green” Article 8 counterparts with respect to assets under management and growth. In 2022, Article 8 funds saw net outflows over the year, while Article 9 funds saw consistent inflows for each quarter, with EUR 5.1 billion of inflows in Q4 alone. When considering growth of flows relative to assets, Article 9 funds have seen greater growth compared with Article 8 funds month-over-month since the introduction of the Sustainable Finance Disclosure Regulation (SFDR) in March 2021. Combined, these seem to evidence investor preference for the dark green Article 9 products over their Article 8 counterparts.
As of March 2023, there were 887 European Article 9 funds (3.6% of all funds by count), down from 1,080 in September 2022, largely due to the number of downgrades to Article 8 observed in Q4 2022.
