Article 8 Funds Suffered Their Highest Quarterly Outflows in Q4 2023

Meanwhile,
Article
9
funds
–
those
with
a
sustainability
objective
–
experienced
their
very
first
quarterly
outflows,
at
€4.7
billion.
 

The
bleak
picture
for
Article
8
and
Article
9
products
in
the
last
three
months
of
2023
contrasts
with
the
positive
momentum
maintained
by
Article
6
funds
(those
with
no
ESG
characteristics)
which
attracted
€15.7
billion
in
net
new
money,
consistent
with
the
figures
observed
in
the
preceding
quarter.

Fig.
1:
Quarterly
Flows
into
Article
8
and
Article
9
Funds
Versus
Article
6
Funds
(EUR
Billion)
and
Organic
Growth
Rates
(%)

Overall
Article
8
funds
registered
net
outflows
of
€27
billion
in
2023,
while
Article
9
funds
collected
€4.3
billion
and
Article
6
funds
garnered
€93
billion.

Why
is
ESG
Appetite
Waning?

Several
factors
contributed
to
waning
investor
appetite
for
Article
8
and
Article
9
funds
last
year.
They
included
the
macroeconomic
environment,
high
interest
rates,
inflation,
fears
of
recession
among
some
major
world
economies,
and
geopolitical
risks.

Among
other
implications,
that
led
investors
to
favour
government
bonds,
an
area
where
ESG
integration
remains
a
challenge.
In
fact,
it’s
not
feasible
to
integrate
ESG
considerations
into
single-country
government
funds
investing
in,
say,
US
Treasuries
or
UK
gilts.

In
addition,
it’s
fair
to
assume
some
investors
took
a
more
cautious
approach
to
ESG
investing
last
year
in
the
wake
of
the
underperformance
of
ESG
and
sustainable
strategies
in
2022.
That
itself
was
due
to
the
typical
underweight
in
traditional
energy
companies
and
overweight
in
technology
and
other
growth
sectors
that
struggled
at
the
time.
While
the
latter
rebounded
in
2023,
other
popular
sectors
in
sustainable
strategies
continued
to
underperform.
Renewable
energy
companies,
for
example,
have
been
particularly
affected
by
soaring
financing
costs,
materials
inflation,
and
supply
chain
disruptions,
among
other
issues.

Additional
factors
weighing
on
investor
demand
for
Article
8
and
Article
9
products
include
greenwashing
concerns
and
the
ever-evolving
regulatory
environment.
To
some
degree,
the
wave
of
fund
reclassifications
to
Article
8
from
9
in
late
2022
and
other
issues
related
to
the
implementation
of
SFDR
have
also
caused
confusion
among
investors.

Active
Funds
Drove
Outflows,
so
What
Did
Passives
do?

Active
funds
drove
all
the
Article
8
fund
outflows
in
the
fourth
quarter
as
well
as
over
the
full
year.
Contrasting
with
the
challenges
faced
by
their
active
peers,
passive
Article
8
funds
sustained
their
momentum
throughout
2023.

Fig.
2:
Net
Flows
Into
Article
8
Funds
Divided
by
Active
and
Passive

Meanwhile,
active
funds
in
the
Article
9
category
enjoyed
continued
inflows
until
last
quarter,
when
they
suffered
€5
billion
of
redemptions.
Passive
Article
9
strategies
garnered
positive
net
flows
in
all
but
one
quarter.
Inflows
into
this
group
of
funds
shrunk
significantly
following
the
reclassification
of
many
large
exchange-traded
funds
(ETFs)
and
index
funds
tracking
climate
benchmarks
in
late
2022
and
early
2023.

Fig.
3:
Net
Flows
Into
Article
9
Funds
Divided
by
Active
and
Passive

Article
8
and
Article
9
Fund
Assets
Rise
to
a
Record
EUR
5.2
trillion

Despite
the
outflows,
combined
assets
in
Article
8
and
Article
9
funds
increased
by
1.7%
over
the
fourth
quarter
to
€5.2
trillion
–
a
new
record.
Conversely,
Article
6
fund
assets
declined
by
2.4%.

Together,
Article
8
and
Article
9
funds
saw
their
market
share
rise
further
to
almost
60%
of
the
EU
universe.
In
other
words,
almost
60%
of
the
money
invested
in
funds
in
the
EU
claims
to
have
some
ESG
characteristics.
This
absolute
and
relative
increase
in
Article
8
and
Article
9
assets
can
be
explained
by
the
continued
activity
of
product
reclassification
from
Article
6
to
Article
8
or
9
as
well
as
stock
and
bond
price
appreciation.

Fig.
4:
Quarterly
Asset
Breakdown
by
SFDR
Classification
(EUR
Trillion)               
             

Despite
the
continued
redemptions,
Article
8
funds
maintained
their
market
share
at
around
55%
at
the
end
of
December
2023.
The
share
of
Article
9
products
stayed
at
3.5%,
showing
trivial
change
compared
with
the
previous
quarter.

Sources:
Morningstar
Direct.
Assets
as
of
December
2023.
Based
on
SFDR
data
collected
from
prospectuses
on
97.8%
of
funds
available
for
sale
in
the
EU,
excluding
money
market
funds,
funds
of
funds,
and
feeder
funds

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