Analysis of the sustainability of the largest Article 8 and 9 ETFs, along with recently reclassified ETFs, highlights SFDR's potential. SFDR's success, however, hinges on the regulators next moves.
The introduction of Level 2 of the European Union’s Sustainable Finance Disclosure Regulation has sent shockwaves through the European sustainable investment landscape. Suggestions around thresholds for what counts as ‘sustainable investments’, accompanied by a lack of clarity surrounding definitions triggered a mass downgrade of many funds, driven largely by ETFs tracking Paris-Aligned Benchmarks and Climate Transition benchmarks downgrading from Article 9 (supposedly ‘dark green’) to Article 8 (supposedly ‘light green’).
The purpose of this report is to examine the state of the EU sustainable passive ETF market in the aftermath of the ‘great reclassification’, to better understand the impact that the introduction of the Level 2 RTS has had on the Article 8 and Article 9 classifications, and more broadly, the core challenges facing SFDR.
This analysis of Article 8 and 9 ETFs highlights sustainability differences between ETFs pursuing ESG, Paris-aligned and ‘solutions-focussed’ strategies. Recent regulatory guidelines fail to sufficiently account for these differences. SFDR must adapt to accommodate and delineate between these nuanced approaches, whilst maintaining minimum standards, in order to be an effective force for increased clarity and transparency in the European sustainable fund landscape. The analysis is based on Matters SDG alignment, SFDR PAIs, and thematic ESG datasets.