Finnish asset manager Aktia is launching a sustainable corporate bond fund in accordance with the EU’s Sustainable Finance Disclosure Regulation (SFDR) Article 9 or ‘Dark Green’ classification.
Placing sustainability as the centre of its investment objectives aligns the UI-Aktia Sustainable Corporate Bond fund with Article 9 of the SFDR, and makes it ‘dark green’. Funds ‘promoting sustainability’ align with Article 8 and are designated ‘light green’.
Investing in European sustainable development bonds, the fund aims to achieve significant social and environmental benefits. Initially open to institutional investors, the fund also plans to target retail investors at a later stage.
A high risk of reputational loss, and higher disclosure and reporting requirements has limited the number of Article 9 bond funds yet market demand remains high. They attracted more funds in 2Q of 2022 than Article 6 and 8 funds, per Morningstar.
In addition to green, social, and responsible bonds, the fund will also invest sustainability-linked bonds (SLB), which are typically used in transition financing. While a reduction in carbon emissions is part of the definition of Article 9, investment in SLBs could add a further reporting and disclosure burden on the fund.
Each investment in the portfolio will also be required to have a positive net impact on society and the environment. Aktia (HEL:AKTIA) will use ESG analysis from ISS and Sustainalytics, as well as bottom-up company specific ESG data to assess the underlying social and ecological impact. It will use an AI-based impact tool from Upright Project for analytics and reporting.
For sustainable investing in Europe SFDR Article 9 is the darkest shade of green
The SFDR has gone some way in providing definitions for sustainable investing since its inception in 2021. Yet, despite extensive rules around what qualifies as a sustainable investment fund (Article 8 or 9), investors are still left to do additional due diligence and have to be wary of greenwashing.
Article 9 funds are also called dark green, because they are more stringent in their sustainable investment criteria. Article 9 funds are those that specifically have sustainable goals as their objective. An example of this could be reducing carbon emissions as a goal. Some criticism of the use of the term ‘green’ remains as it can be hard to quantify shades of colour, but it is a useful attempt to distinguish between different approaches.
High demand will drive more funds to become dark green
Market demand for sustainable investments remains high, yet there is increasing caution over labelling and greenwashing. Article 9 funds saw an influx of €6 billion in the second quarter of 2022, but Article 8 funds saw a net outflow. This outflow resulted in a 6.4% decline in Article 8/9 assets, although they still combined to account for half the EU fund universe.
Fund managers are under constant pressure to offer Article 8 and Article 9 funds in response to high market demand. But they have to be wary of mislabelling and other missteps which can risk regulatory scrutiny and loss of reputation. A recent review of Article 8 funds by Morningstar (NMS:MORN) showed that 23% don’t meet its standards as an ESG fund. A further 1,200 funds, managing nearly $1 trillion in assets, were stripped of their ESG status earlier this year.
In the second quarter alone, 16 funds were downgraded from Article 9 to Article 8, which can raise concerns for investors. Investment managers have to also be careful about meeting their investors’ suitability requirements. A recent survey of investors by Oxford Risk showed that almost half had never been consulted by their wealth managers on their sustainability preferences.
Green, social and sustainable bond principles and frameworks seem to suggest that the related bonds would entirely be invested in sustainable projects. Yet Morningstar has found that only 24% of Article 9 funds have no fossil fuel involvement, with many investing in energy and utility companies that are financing their transitions towards net zero emissions.
Competitive landscape shows who’s who among Dark Green fund Managers
Since the SFDR was introduced, the top five firms offering the most article 8/9 funds are Amundi (PAR:AMUN), Nordea (HEL:NDA-FI), Swedbank (ST:SWED-A), J.P. Morgan (NYQ:JPM) and Blackrock (NYQ:BLK). BNP Paribas (PAR:BNP) has seen the biggest gain in market share, jumping from 16th to 6th in the last year.
Many of the top Article 9 funds either have an impact focus or are thematic funds with a positive screening. Of the top twenty largest funds, seventeen have ‘sustainable’ in their name, while another one is aligned with UN SDGs. The other two funds from Handelsbanken (ST:SHB-A) have clearly defined ESG strategies.
Shades of green from stakeholders could add to market confusion
A de facto requirement for issuing green bonds, and the related frameworks is to get a second party opinion (SPO) which provides an independent review of the selection criteria for the projects financed and the allocation of funds. As such, they are meant to provide investors with reassurance that a green bond will meet its requirements.
Cicero Shades of Green AS is one such SPO, which has developed its own methodology to classify how well a bond aligns with its sustainability credentials. Classification ranges from Dark Green to Red, with Medium Green, Light Green and Yellow as interim classifications.
To further complicate matters, one of the article 9 fund market leaders, Blackrock, has developed a proprietary green bond taxonomy. Each BlackRock-labelled green bond gets shaded on a scale of Very Light Green to Dark Green based on use of proceeds, environmental benefits, and its issuers’ ongoing commitment to allocation and impact reporting.
Investing in dark green funds is likely to increase based on market demand, increased green and sustainable debt issuance, and possible reclassification from other categories. The task of all stakeholders will be to ensure that the underlying investments reflect their sustainability credentials, and not their propensity to make investors feel blue.