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Managers downgrading SFDR fund labels

by Silvia Saccardi 5 December 2022

Off the back of several updates to the SFDR, along with delays to the new rules, several managers have opted to downgrade the labelling of their funds.

Last month, European regulators announced a delay to the review of PAI (principle adverse impact) indicators and SFDR RTS (regulatory technical standards) by six months until October 2023.

The European Supervisory Authorities (ESAs) have highlighted a potential significant development to be a review of its Do No Significant Harm (DNSH) framework. This is likely to entail a more standardised and objective strategy for GPs to adhere to, as there is currently no specified method to apply the framework.

Minimum standards and thresholds are also expected to be elevated for Article 8 & Article 9 products to reflect the crackdown on greenwashing.

To aid the implementation of RTS, the ESAs published a Q&A in an attempt to demystify the upcoming legislation. Key areas include understanding PAI indicators in practice, definitions of socially sustainable investments, completion of fund-level templates under RTS, and good governance. The Q&A was released in the context of fund managers finalising Article 8 & 9 product closures. Guidance was provided on how to use PAI indicators in practice as the legislation proves confusing for many.

ESMA is currently consulting on its guidelines for fund names using ESG and sustainability-related terms. The consultation closes in February 2023 with the expectation of publishing the final guidelines by Q3/Q4 2023. More on this can be found here.

At the expense of a label

The tightening regulations around fund names along with the possible introduction of a minimum threshold for Article 8 & 9 funds has potentially caused an increase in fund managers downgrading their fund labels.

For example, Amundi and DekaBank have all recently announced that they will be downgrading their Article 9 funds. Eve Ellis, partner at Ropes & Gray, believes there are three potential reasons for this: “Firstly, in June, there was guidance published which clarified that if you're an Article 9 fund, all your investments need to be sustainable. Another reason is that again, a few months back, there were some questions that were raised to the European Commission around what is the definition of a sustainable investment. Lastly, the review of the PAI guidelines has been pushed back and one point mentioned when this was done was whether there should be baseline cons thresholds for the do no significant harm concept. This is a key component to whether something is a sustainable investment. A combination of these factors may make it harder for a fund to be Article 9 eligible.”

In addition, the latest SFDR updates are following a constant course of divergence against the UK’s ESG guidelines post-Brexit. For example, the FCA recently launched a working group co-chaired by asset manager M&G, LSE Group, law firm Slaughter & May and credit rating giant Moody. Its stakeholders include ESG data and rating providers as well as investors. The voluntary UK-based ESG conduct group has been created with its own set of guidelines to adhere to.

When asked how GPs could navigate the amount of regulation required under different jurisdictions, Ellis advises: “I think GPs are definitely grappling with complying with the different requirements, which are similar, but by no means consistent. One of the biggest practical pieces of advice that we give to clients on SFDR implementation is to think about it at an early stage in the product launch. This ensures everyone is on the same page as to the direction of travel that you're going from an ESG perspective.”


In June 2022, the ESAs clarified the SFDR and Taxonomy Regulation in a statement.

It addressed a number of queries following the final published regulatory technical standards (RTS) in April, particularly around disclosure requirements and the use of sustainability indicators.

The clarification of the technical standards followed two rounds of delays, one in September and one in November 2021, to the application of the SFDR’s second phase, currently scheduled for January 2023.

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