Sustainable Investing
Article 6, 8 and 9 funds
Article 6, 8 and 9 funds are the three classifications of investment strategy that will apply to Robeco’s products under the EU’s Sustainable Finance Disclosure Regulation . This new set of rules coming into effect from this year will force asset managers to reveal the differing levels of sustainability integration and focus of each investment strategy that they offer.
The regulation aims to create a more transparent playing field, partly to prevent greenwashing – where some financial firms claim that their products are sustainable when they are not. This bodes well for Robeco’s suite of strategies that have embraced sustainability for decades and can now be appropriately labeled as such.
Under the new classifications, a strategy will labeled under either Article 6, 8 or 9 of the SFDR:
Article 6 covers funds which do not integrate any kind of sustainability into the investment process and could include stocks currently excluded by ESG funds such as tobacco companies or thermal coal producers. While these will be allowed to continue to be sold in the EU, provided they are clearly labelled as non-sustainable, they may face considerable marketing difficulties when matched against more sustainable funds.
Article 8, also known as ‘environmental and socially promoting’, applies “… where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.”
Article 9, also known as ‘products targeting sustainable investments’, covers products targeting bespoke sustainable investments and applies “… where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark.”
Creating returns that benefit the world we live in
The vast majority of strategies at Robeco will be classified as Article 8. These are funds which form part of our Sustainability Inside range, which has ESG integrated as standard, or the Sustainability Focused range, which has more specific targets, such as achieving a lower carbon footprint than the benchmark.
Robeco’s Impact Investing range of strategies will be classified as Article 9. These include bespoke funds targeting climate change, renewable energy, the UN’s Sustainable Development Goals and specific themes such as gender equality. All are labeled as RobecoSAM.
Only a handful of strategies will fall under the Article 6 classification. These are those that cannot realistically include ESG factors, such as those that rely on derivatives, or cash savings accounts.
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SFDR Article 8 and Article 9 Funds: the current situation six months away from level 2
The arrival and expansion of article 8 and article 9 funds
Since March 2021, asset managers (as well as players in the financial markets) must classify their funds (or other investment products) depending on their sustainability purpose, in order to ascertain which reporting obligations to fulfill under the Sustainable Finance Disclosure Regulation (SFDR)1.
Besides funds that do not take into account sustainability risks (commonly known as “article 6” funds), there are: funds i) which promote, among other, environmental or social characteristics, provided the companies in which investments are made follow good governance practices (commonly known as “article 8” funds) or ii) that have sustainable investment as its objective and comply with the “do no significant harm” principle to environmental or social objectives (or “article 9” funds).
Theoretically, the difference is simple: unlike article 9 funds, actively attempting to achieve environmental and social features, in article 8 funds this designation can be accomplished with or without sustainable investment (as long as there is the promotion of environmental or social characteristics). For example, one fund may be an article 8 fund if it has adopted mandatory principal adverse sustainability indicators (“PASIs”) and integrates sustainability risk indicators into its investing choices (i.e. even though technically it does not intend to advance sustainable investments).
Article 8 and article 9 funds have grown in number and size dramatically over the last two years. Below are some statistics which illustrate the expansion of these types of products in the European investment landscape:
- 20 days after the Regulation has come into force 2 , articles 8 and 9 funds accounted for up to 21% of the European funds and 25% of the total European fund assets. At the time, Amundi and BNP Paribas top the list of the largest providers of article 8 or 9 investment products and Nordic and Dutch assets had the largest percentage of fund assets invested by these funds;
- In the first quarter of 2021, the net assets of article 8 funds totaled 3.7 trillion euros, which represented 22% of the European fund market. Luxembourg stood out, accounting for 35% of the funds analyzed by the EFAMA’s study 3 . Concerning article 9 funds, net assets totaled 340 billion euros, close to 2% of the European fund market with 71% being equity funds;
- In the last quarter of 2021 4 , the net assets of article 8 and 9 funds totaled 4.05 trillion euros, accounting for 42.4% of all funds sold in the EU and 29% of the EU fund universe (an increase of 16% compared to the previous quarter). 25% of the funds were article 8 funds and only 3% were classified as article 9 funds. In this quarter alone, nearly 200 new funds were classified as either article 8 or 9 funds, especially funds linked to environmental matters (close to one-fifth);
- At the end of the first quarter of the present year 5 , net outflows from article 8 funds totaled 3.3 billion euros, and net inflows from article 9 totaled 8.6 billion euros. The two categories represent a percentage of 45.6% of the total European fund assets.
SFDR articles 8 and 9 funds (and respective capital flows) have grown considerably. In fact, it is anticipated that soon article 8/9 fund’s assets may equal half of the total assets covered by the SFDR 6 .
Classification of sustainable funds
Although with the SFDR there has been some progress in helping investors understand and compare the sustainability characteristics of funds, it was not meant to be a labeling system: its vague concepts and the resulting differences in interpretations pose a major challenge for asset managers.
Classifying funds continues to be one of the most difficult tasks in complying with the SFDR. As a result of the flexibility of the Regulation to self-define, with unclear and ambiguous wording, different methods of fund categorization have been used by asset managers. This scenario has led to distinctions in results (funds with similar characteristics are being classified in different categories) and has even led to misunderstanding and accusations of greenwashing, contrary to what was the aim of the legislator.
Article 8 has become an all-encompassing category, home to a diverse range of asset types with disparate strategies on ESG. Due to the plasticity in the language of article 8, it is feared that some asset managers will claim to consider ESG factors only to be classed within this category. While some funds have aligned their strategies with the objectives defined by the SFDR, others have only formalized ESG exclusions without changing any characteristic of their investment process or strategy. Many asset managers justify the article 8 classification simply by stating that ESG considerations are "included" in the investment decision.
A study of MainStreet Partners 7 concluded that in 21% of situations, the article 8 fund classification is questionable, and Morningstar has removed nearly 1,200 funds with $1.4 trillion in assets under management (AUM) off its European sustainable investing list, the majority of those are self-declared article 8 funds.
The scope of article 9 is narrower, covering funds with a greater focus on impact or with good screening (funds applying thematic/impact investment approaches). However, there are also funds of this kind that end up being classified under article 8. The conclusion is that some asset managers are prudish, while some are being too kind: the classifications differ because there is a different ESG risk rating among asset managers.
To add to the complexity, managers are reclassifying funds through improving ESG integration procedures, introducing ESG exclusions, or adopting different approaches. According to Morningstar 8 , more than 1,800 funds have reclassified their funds from article 6 to article 8 or 9 or from article 8 to 9 since March 2021.
Considering the broad and hazy definitions, certain jurisdictions such as Germany, Spain or Ireland, are creating their own procedures for disclosures and labeling in order to clarify the
differentiation between sustainable funds. For instance, France's AMF (Autorité des Marchés Financiers) mandates ESG funds to remove 20% of the investable area based on ESG considerations, and BaFin, the German financial regulator, proposed additional minimum standards for a fund to be considered sustainable.
In addition, some companies have introduced other criteria to differentiate between article 8 and article 9 funds. According to JP Morgan Asset Management and Fidelity International, for a fund to be designated as article 8, it must invest at least 50% of its net assets in firms with excellent environmental or social qualities. Other asset managers believe that funds should only be classified as article 8 funds if the promotion of E and S characteristics is a mandatory component of its investment strategy.
At the EU level, there has also been talk about the possibility of introducing a minimum sustainability benchmark for article 8 funds9 or even creating a new category between article 8 and article 9 , a so-called “Article 8 plus”. This new category (already adopted informally) is regarded as the outcome of the MiFID II draft sustainability assessment (more stringent than the one under the SFDR).
Level 2 Regulation
With so much to be clarified, the regulatory technical standards produced by the European Supervisory Authorities (“ESA”) (RTSs) are sorely needed to curb the feeling of laxity in fund classification. These have been embodied in Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022, commonly known as level 2 SFDR, which will be implemented in January 2023.
The RTSs were published by the ESA on 4 February 2021 and approved by the European Commission on 6 April 2022 and, together with ESAs explanations on some of the RTS’s most important features, have clarified some key points of the SFDR.
Under the RTS, asset managers must justify their fund classifications with a myriad of information such as list of PASIs, the proportion of sustainable of investments in the fund and
justification as to why the classification under articles 8 or 9 is warranted. Furthermore, this additional information is required to follow a standardized template, akin to a KIID.
It is expected, thus, that with much more detailed information required to be disclosed under SFDR level 2 many original classifications will necessarily need to be revisited.
All in all, the trend will be towards expanding SFDR articles 8 and 9 funds. However, considering the sheer bar for obtaining article 8 status, creating minimal sustainability standards is essential to guarantee consistency and give credibility to SFDR labels. Without a uniform categorization and demanding thresholds, it will be hard for investors to assess the real level of ESG integration in the products they are invested in; also, in a more political level, it will only give ammunition for ESG nay-sayers to dismiss the field as pure fluff.
Filed under
- European Union
- Capital Markets
- Company & Commercial
- Corporate Finance/M&A
- Environment & Climate Change
- Morais Leitão, Galvão Teles, Soares da Silva & Associados
- Sustainable Finance Disclosure Regulation (2019/2088/EU)
Organisations
- European Commission
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Regulation (EU) 2019/2088 - Sustainable Finance Disclosure Regulation (SFDR)
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ESG Disclosure Regulation: a closer look at Article 8 and Article 9
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Diana Ribeiro Duarte and Margarida Torres Gama of Morais Leitão look at the challenges of classification under articles of the SFDR
March 2021 saw Regulation (EU) 2019/2088 of the European Parliament and of the Council of November 27 2019 on disclosure of information related to environmental, social, and governance (ESG) criteria in the financial sector (SFDR) finally becoming applicable.
This regulation, issued in the context of the EU Commission’s commitment to the Sustainable Development Goals of the UN 2030 Agenda for Sustainable Development, represents a major milestone by introducing unprecedented harmonised requirements on sustainability-related disclosure in financial products to a multitude of financial market actors and advisors.
The reporting obligations in this respect apply to multiple entities, including (i) alternative investment managers, (ii) qualified private equity fund managers, (iii) pension product manufacturers and providers of pan-European individual retirement products, (iv) insurance companies and insurance intermediaries that distribute insurance-based investment products, and (v) investment firms and credit institutions that provide portfolio management and investment advice.
Such entities are classified either as financial market participants or financial advisers, depending on their role in the conception, governance, provision and/or placement of the financial products, such classification then impacting their respective duties in terms of ESG disclosure.
The big question: Article 8 or Article 9?
Among other duties, Article 6 of the SFDR includes obligations on financial market participants and financial advisers to disclose in the pre-contractual information regarding the financial product information on the impacts on sustainability risk in the performance of their activities and on the returns of the products.
The exact elements to be made available under the ESG pre-contractual information of financial products depend however on the category of financial product – in particular whether the product is one that “promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices” (Article 8 of the ESG Disclosure Regulation) or one that “has sustainable investment as its objective and an index has been designated as a reference benchmark” (Article 9 of the ESG Disclosure Regulation).
This distinction is not totally clear in practice in all situations, but the legal market has already been experimenting with it.
Article 8 covers products that promote ‘E’ or ‘S’ features, regardless of whether the investment outcome is actually made in ESG products or the investment objective is specifically to have a positive impact on the environment and society (unlike Article 9). The information to be provided to customers refers fundamentally to how the ‘E’ and ‘S’ factors are taken into account, for instance, in the allocation of the product's invested capital and other decisions in the context of the product management.
A financial product will fall within the scope of Article 9 when its objective is primarily to have an ‘E’, ‘S’ or ‘G’ impact, which will usually translate into the majority of the portfolio of such product being comprised of ESG investments.
In a nutshell, an Article 9 product can be said to generally have to meet the following requirements: be (i) an investment in an economic activity (ii) that contributes to an ESG objective, and (iii) simultaneously does not significantly undermine any of these objectives, with (iv) the target company following good governance practices.
Under Article 9, the fact that the investment also has a financial objective does not remove it from the scope of Article 9, but the fact that a product in fact meets the said ESG objectives but is not obliged or expressly mandated to do so will probably remove it from such scope.
The evolving market
In practical terms, this distinction is expected to only become more tangible after several classifications of the financial products are made by the relevant market players. In any case, the approach to the categorisation under these articles has already been reported as not always being consistent among entities and across jurisdictions, which, if not dealt with, may entail risks to the credibility the system.
This issue is not minor, especially taking into account that, in the first month of application of the ESG Disclosure Regulation, investments in funds classified under Articles 8 and 9 are said to have reached 25% of all European assets.
The market is changing rapidly, and financial market operators are seeking to achieve a better ESG rating by investing massively in financial products rated under Articles 8 and 9 of the SFDR.
Increasing regulation will undoubtedly tend to encourage them to adopt ESG aspects in their investment processes, leading to an inevitable connection between profitable and sustainable investment, but attention should be drawn to the densification of some criteria in order to mitigate risks of it being seen as somehow enabling ‘greenwashing’ (in particular, under Article 8).
Diana Ribeiro Duarte
Senior lawyer, Morais Leitão
E: [email protected]
Margarida Torres Gama
E: [email protected]
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Sustainable Finance Disclosure Regulation
- FREQUENTLY ASKED QUESTIONS
- PRODUCT CLASSIFICATION
The Sustainable Finance Regulation Disclosure (SFDR) seeks to enhance sustainability-related disclosures by imposing requirements on financial market participants (e.g. asset managers and investment advisers) and financial products (e.g. Funds). The regulation is part of the European Commissions’ Action Plan on Sustainable Finance and applies to products domiciled in the European Union (EU) or sold to EU investors. The regulation will require 1) the integration of sustainability risks in financial market participants’ investment decision-making processes, and transparency with respect to products which target sustainable investment, and 2) updates to product documentation including prospectuses, websites and ad hoc marketing material.
Sustainability risks include environmental, social or governance events or conditions that, should they occur, could cause an actual or a potential material negative impact on the value of your investments.
Frequently Asked Questions
The SFDR came into force in December 2019. The regulation is split into Level I and Level II requirements. The Level I requirements will apply as of 10 March 2021. Application of the Level II technical standards has been delayed with an effective date of January 2023.
The SFDR applies to both products and financial market participants. All of Morgan Stanley Investment Management (MSIM) in scope Funds, separately managed accounts and in scope entities (e.g. MSIM Fund Management (Ireland) Limited) will be in compliance with the relevant requirements of the regulation.
The SFDR does not require any changes to the way products are managed, but does require an enhanced level of disclosure. The nature and extent of these disclosure requirements depend on product classification under the regulation.
Products which have met certain ESG criterion with respect to investment process or objective may be classified as Article 8 or Article 9 products. All products which do not meet these criterion are classified as Article 6 or ‘other’ products. Article 8 products promote environmental or social characteristics in the pursuit of other financial objectives. Article 9 products seek to make a positive impact on society or the environment through sustainable investment and have a non-financial objective at the core of their offering. For both Article 8 and 9 products ESG considerations are binding.
All of MSIM’s EU domiciled Funds are in scope of the regulation (e.g. Morgan Stanley Investment Funds, Morgan Stanley Liquidity Funds, etc.) as are MSIM’s funds which are domiciled outside of EU but which are registered for distribution under AIFMD. For more information on MSIM product classifications click here . Product classifications may change over time with the evolution of investment strategies.
Fund investors will be informed of SFDR through the usual client communication processes. In some cases, updates to product offering documents to meet the disclosure regulation will coincide with product changes. In these instances such changes may be subject to a notice period.
Investors who have a separately managed account will be informed individually in advance of the deadline of the enhanced disclosure requirements. No changes are required or anticipated to the way that existing separately managed accounts are managed.
Product Classifications
The Sustainable Finance Disclosure Regulation requires Morgan Stanley to classify all of its in scope products and accounts. SFDR product classifications fall under 3 categories: Article 8, Article 9 and ‘Other.’ Article 8 and Article 9 products consider sustainability in a binding way. In addition, Article 8 products promote social and or environmental characteristics and Article 9 products have a sustainable objective. Products which do not meet either the definition of Article 8 or Article 9 are classified as ‘other.’
Please see below a list of all of the SFDR classifications of all in-scope Morgan Stanley Investment Funds. To note, in some cases, a distinction is made between current classification and anticipated classifications. This distinction is drawn where Morgan Stanley is actively working to further enhance the sustainability characteristics of the relevant investment strategy and that this work will result in a change in product classification. These changes are subject to a number of internal and regulatory approvals and may be subject to a 30-day shareholder notice period. For that reason, full detail of the nature of the change or the final effective date of the amended investment objective may not yet be public.
MSIM’s Sustainable Investing Policy , which describe the firm’s high-level approach to ESG and sustainable investing, is available on MSIM’s Sustainable Investing webpage along with our Engagement and Stewardship Principles , which describe the firm’s commitment to active ownership. In addition, MSIM publishes a Global Stewardship report as well as a UK Stewardship Report which highlight our approach to, and progress on, integrating stewardship activities within our investment processes and workplace.
MSIM has enhanced entity level sustainability disclosures to comply with the Level I SFDR requirements. In addition to firm/entity level disclosures, MSIM’s individual investment teams may also publish information on their team or strategy specific approaches to sustainable investing and engagement/stewardship. Where relevant these resources are also available on msim.com along with other product level information
For more information about the Sustainable Finance Disclosure Regulation click below.
RISK CONSIDERATIONS
There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events.
ESG strategies that incorporate impact investing and/or environmental, social and governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.
In general, equity securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Real estate investments , including real estate investment trusts, are subject to risks similar to those associated with the direct ownership of real estate.
Alternative investments are speculative, involve a high degree of risk, are highly illiquid, typically have higher fees than other investments, and may engage in the use of leverage, short sales, and derivatives, which may increase the risk of investment loss. These investments are designed for investors who understand and are willing to accept these risks. Performance may be volatile, and an investor could lose all or a substantial portion of its investment.
DISTRIBUTION
This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.
Ireland : MSIM Fund Management (Ireland) Limited. Registered Office: The Observatory, 7-11 Sir John Rogerson’s, Quay, Dublin 2, Ireland. Registered in Ireland under company number 616661. Regulated by the Central Bank of Ireland. United Kingdom : Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA, authorised and regulated by the Financial Conduct Authority. Dubai : Morgan Stanley Investment Management Limited (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158). Germany : MSIM Fund Management (Ireland) Limited Niederlassung Deutschland Junghofstrasse 13-15 60311 Frankfurt Deutschland (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Italy : MSIM Fund Management (Ireland) Limited, Milan Branch (Sede Secondaria di Milano) is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland, and whose registered office is at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited Milan Branch (Sede Secondaria di Milano) with seat in Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy, is registered in Italy with company number and VAT number 11488280964. The Netherlands : MSIM Fund Management (Ireland) Limited, Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. Telephone: 31 2-0462-1300. Morgan Stanley Investment Management is a branch office of MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. France : MSIM Fund Management (Ireland) Limited, Paris Branch is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland and whose registered office is at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited Paris Branch with seat at 61 rue de Monceau 75008 Paris, France, is registered in France with company number 890 071 863 RCS. Spain : MSIM Fund Management (Ireland) Limited, Sucursal en España is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland and whose registered office is at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited, Sucursal en España with seat in Calle Serrano 55, 28006, Madrid, Spain, is registered in Spain with tax identification number W0058820B. Switzerland : Morgan Stanley & Co. International plc, London, Zurich Branch Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-115.415.770. Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland, Telephone +41 (0) 44 588 1000. Facsimile Fax: +41(0) 44 588 1074.
Brazil: This document does not constitute a public offering of securities for the purposes of the applicable Brazilian regulations and has therefore not been and will not be registered with the Brazilian Securities Commission (Comissão de Valores Mobiliários) or any other government authority in Brazil. All information contained herein is confidential and is for the exclusive use and review of the intended addressee of this document, and may not be passed on to any third party.
Chile: Neither the Fund nor the interests in the Fund are registered in the Registry of Offshore Securities (el Registro de Valores Extranjeros) or subject to the supervision of the Commission for the Financial Market (la Comisión para el Mercado Financiero). This document and other offering materials relating to the offer of the interests in the Fund do not constitute a public offer of, or an invitation to subscribe for or purchase, the Fund interests in the Republic of Chile, other than to individually identified purchasers pursuant to a private offering within the meaning of Article 4 of the Chilean Securities Act (la Ley del Mercado de Valores) (an offer that is not “addressed to the public at large or to a certain sector or specific group of the public”).
Colombia: This document does not constitute an invitation to invest or a public offer in the Republic of Colombia and is not governed by Colombian law. The interests in the Fund have not been and will not be registered with the National Register of Securities and Issuers (el Registro Nacional de Valores y Emisores) maintained by the Financial Supervisory Authority of Colombia (la Superintendencia Financiera de Colombia) and will not be listed on the Colombian Stock Exchange (la Bolsa de Valores de Colombia). The interests in the Fund are being offered under circumstances which do not constitute a public offering of securities under applicable Colombian securities laws and regulations. The offer of the interests in the Fund is addressed to fewer than one hundred specifically identified investors. Accordingly, the interests in the Fund may not be marketed, offered, sold or negotiated in Colombia, except under circumstances which do not constitute a public offering of securities under applicable Colombian securities laws and regulations. This document is provided at the request of the addressee for information purposes only and does not constitute a solicitation. The interests in the Fund may not be promoted or marketed in Colombia or to Colombian residents unless such promotion and marketing is carried out in compliance with Decree 2555 of 2010 and other applicable rules and regulations related to the promotion of foreign financial and securities related products or services in Colombia.
Colombian eligible investors acknowledge that the interests in the Fund (i) are not financial products, (ii) are transferable only in accordance with the terms of the Fund's constitutional documents and (iii) do not offer any principal protection.
Colombian eligible investors acknowledge Colombian laws and regulations (in particular, foreign exchange, securities and tax regulations) applicable to any transaction or investment consummated in connection with an investment in the Fund, and represent that they are the sole liable party for full compliance with any such laws and regulations. In addition, Colombian investors acknowledge and agree that the Fund will not have any responsibility, liability or obligation in connection with any consent, approval, filing, proceeding, authorization or permission required by the investor or any actions taken or to be taken by the investor in connection with the offer, sale or delivery of the interests in the Fund under Colombian law.
Mexico: Any prospective purchaser of the interests in the Fund must be either an institutional investor (inversionista institucional) or a qualified investor (inversionista calificado) within the meaning of the Mexican Securities Market Law (Ley del Mercado de Valores) (the “Securities Market Law”) and other applicable Mexican laws in effect.
The interests in the Fund have not and will not be registered in the National Registry of Securities (Registro Nacional de Valores) maintained by the Mexican Banking and Securities Commission (Comisión Nacional Bancaria y de Valores). The interests in the Fund may not be offered or sold in the United Mexican States by any means except in circumstances which constitute a private offering pursuant to Article 8 of the Securities Market Law and its regulations. No Mexican regulatory authority has approved or disapproved the interests in the Fund or passed on the solvency of the Fund. All applicable provisions of the Securities Market Law must be complied with in respect of any sale, offer or distribution of, or intermediation in respect of, the Fund interests in, from or otherwise involving Mexico, and any resale of the interests in the Fund within Mexican territory must be made in a manner that will constitute a private offering pursuant to Article 8 of the Securities Market Law and its regulations.
Peru: The interests in the Fund have not been and will not be registered in Peru under Decreto Legislativo 862: Ley de Fondos de Inversión y sus Sociedades Administradoras or under Decreto Legislativo 861: Ley del Mercado de Valores (the “Securities Market Law”), and are being offered to institutional investors only (as defined in article 8 of the Securities Market Law) pursuant to a private placement, according to article 5 of the Securities Market Law. The interests in the Fund have not been registered in the securities market public registry (Registro Público del Mercado de Valores) maintained by, and the offering of the Fund interests in Peru is not subject to the supervision of, the Superintendencia del Mercado de Valores. Any transfers of the Fund interests shall be subject to the limitations contained in the Securities Market Law and the regulations issued thereunder.
Uruguay: The offering of the Interests qualifies as a private placement pursuant to section 2 of Uruguayan law 18,627. The Interests will not be offered or sold to the public (Individuals or Companies) in Uruguay, except in circumstances which do not constitute a public offering or distribution through a recognized Exchange under Uruguayan laws and regulations,. Neither the Fund nor the Interests are or will be registered with la Superintendencia de Servicios Financieros del Banco Central del Uruguay. The Fund corresponds to an investment fund that is not an investment fund regulated by Uruguayan law 16,774 dated September 27, 1996, as amended.
HONG KONG : This document has been issued by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this document have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this document shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong.
Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectuses contain this and other information about the funds. To obtain a prospectus please download one at morganstanley.com/im or call 1-800-548-7786. Please read the prospectus carefully before investing.
Morgan Stanley Distribution, Inc. serves as the distributor for Morgan Stanley funds.
IMPORTANT INFORMATION
EMEA: This marketing communication has been issued by MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. MSIM Fund Management (Ireland) Limited is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland.
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Article 8 products are those which promote environmental or social characteristics and which integrate sustainability into the investment process in a binding manner.
Article 9 products are those which have a sustainable investment objective and which integrate sustainability into the investment process in a binding manner.
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SFDR: What is article 6, 8 & 9?
The SFDR requires asset managers to classify their funds as either an article 6, 8 or 9 fund depending on their level of sustainability – but what does this mean, exactly?
Does the SFDR apply to you? Get your own Worldfavor SFDR guide:
In this blog, we have gathered everything you need to know about SFDR articles 6, 8 and 9. What articles are you affected by? How do you comply? And what is needed for a fund to be classified ESG? Let’s have a look:
What is the SFDR?
SFDR is a part of the EU’s Financing Sustainable Growth Action Plan and was established to reorientate capital flow towards sustainable finance. SFDR requires asset managers and other financial market participants to provide transparency on sustainability and imposes mandatory ESG disclosure obligations.
SFDR article 6, 8 & 9: Disclosure requirements
The SFDR sets out mandatory ESG disclosures requirements for asset managers to comply with. The aim is to create more transparency into their investment strategies and prevent greenwashing and claims that products are sustainable when they are in reality not.
According to the SFDR’s classification system, a fund will either be classified as an article 6,8 or 9 fund – depending on their characteristics and level of sustainability:
Article 6: Funds without a sustainability scope
Article 8: Funds that promote environmental or social characteristics (light green)
Article 9: Funds that have sustainable investment as their objective (dark green)
In essence, article 6 requires asset managers to disclose the integration of sustainability risks in their funds– regardless if the fund is promoted as ESG or not. Investments promoted as ESG, however, are required to classify as being either an article 8 or 9 fund, depending on which classification requirements their financial products meet. Many are referring to article 8 funds as “light green” and article 9 as “dark green” since the requirements are higher to be labeled an article 9 fund. Just to make it extra crisp, let’s dive even deeper into what the different articles imply and what you have to do to meet the requirements.
What is SFDR article 6?
Article 6: Transparency of the integration of sustainability risks requires the following:
“Financial market participants shall include descriptions of the following in pre-contractual disclosures:
The manner in which sustainability risks are integrated into their investment decisions; and
The results of the assessment of the likely impacts of sustainability risks on the returns of the financial products they make available.
Where financial market participants deem sustainability risks not to be relevant, the descriptions referred to in the first subparagraph shall include a clear and concise explanation of the reasons therefore.”
This means that provisions for the above disclosures must be included already in the fund’s prospectus. If sustainability risks are considered to be relevant for a fund, assets managers are required to:
Declare that they have integrated sustainability risks into the investments decisions;
Develop a process to assess and identify the most significant risks
Have a disclosure policy in place that mitigate and acts on risks;
Describe how it will be achieved and track the implementation and results
And remember, funds don’t have to be classified as ESG or Green for this article to apply, and if a fund deems sustainability risks not to be relevant, it must clearly be stated and rationalized according to the article.
What is SFDR article 8?
For a fund to comply with article 8: Transparency of the promotion of environmental or social characteristics in pre‐contractual disclosures requires the following:
“Where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices, the information to be disclosed pursuant to article 6 shall include the following:
Information on how those characteristics are met;
If an index has been designated as a reference benchmark, information on whether and how this index is consistent with those characteristics.”
Financial market participants shall include in the information to be disclosed pursuant to article 6(1) and (3) an indication of where the methodology used for the calculation of the index referred to in paragraph 1 of this article is to be found.
So, article 8 applies to funds promoting environmental and social objectives and which take more into account than just sustainability risks as required by article 6.
However, article 8 funds don’t have ESG objectives or core objectives – as required for becoming labeled an article 9 fund.
What is SFDR article 9?
For a fund to comply with article 9: Transparency of sustainable investments in pre‐contractual disclosures requires the following:
“Where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark, the information to be disclosed pursuant to article 6 shall be accompanied by the following:
- Information on how the designated index is aligned with that objective;
- An explanation as to why and how the designated index aligned with that objective differs from a broad market index.”
Compared to article 8 funds, which should promote environmental or social characteristics and have good governance practices, article 9 funds should make a positive impact on society or the environment through sustainable investment and have a non-financial objective at the core of their offering. Both article 8 and article 9 funds will be considered ESG aligned, only that the latter one is for even further forerunners in sustainability, hence the light green and dark green reference.
How the EU Taxonomy links to SFDR
The EU Taxonomy is a classification system for environmentally sustainable economic activities and is integrated into the SFDR – specifically article 8 or 9 as these cover environmentally and or socially sustainable investments.
For both articles, a fund needs to disclose information about the proportion of Taxonomy alignment. Alignment should be expressed as percentage in turnover, capex and opex and also separated per transitional and enabling activities.
Integrate your ESG risk analysis in Worldfavor
If you need help to get going with your SFDR reporting and follow-up process, then we got the solution for you! Worldfavor’s Sustainable Investment is a finance solution that allows you to collect, aggregate and analyze all needed data in order to comply with the SFDR and report on time. Whether you’re directly or indirectly affected by the SFDR framework, Worldfavor’s experts can help you to comply with the reporting and disclosure requirements.
Download our guide Align and report on SFDR with Worldfavor and learn about how the SFDR process works and the benefits of using a sustainability platform to complete your report.
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The state of sustainable investments – key takeaways
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SFDR Blog Series: Article 8 vs Article 9 Classification
Published: 3 Aug 2022 · Last updated: 9 Nov 2022
SFDR Level 1, implemented in March 2021, required fund managers to classify their existing funds according to Articles 6, 8, or 9.
Level 2 of this regulation is due to be enforced from January 1st 2023. It requires managers to disclose detailed information to reinforce these initial classifications. The first draft of the Level 2 requirements, known as the Regulatory Technical Standards ( RTS ), was originally published in early 2021. Since this initial publication, there have been a number of redrafts. Q&As have also been published by the European Commission (EC), clarifying technical details with regard to the implementation of Level 2 regulations. Part of the supplementary information provided pertains to the requirements for Article 8 and 9 fund classification. These requirements, until recently, have been unclear.
In this blog, we outline the key takeaways from these recent publications. We provide fund managers with a clear understanding of the requirements for Article 8 and 9 classifications. We also introduce the concept of Article 8+ funds.
Before we dive into these requirements, there are two elements of SFDR that are worth emphasising.
The two crucial elements of SFDR
Firstly, whilst this blog focuses on fund-level disclosures and the associated asset-level disclosures, there are other firmwide disclosures required for SFDR compliance. Please refer to this earlier blog in our series for further detail.
Secondly, it is important to note that there are still minimum disclosure requirements associated with being classified as an Article 6 fund. This blog, however, focuses on the additional disclosures required for Article 8 and Article 9 classification. Funds are automatically classified under Article 6, unless proven otherwise by the fund manager.
The remainder of the blog is structured as follows: firstly, disclosures specific to Article 8, 8+, and 9 funds are outlined. Secondly, disclosures common to all of these funds are then summarised. This should not be treated as a comprehensive list for compliance purposes. It aims to cover the key disclosure areas for fund managers in a succinct manner.
Fund-specific disclosures
Article 8 funds: the promotion of environmental and/or social characteristics.
As suggested by its definition, disclosures for Article 8 classification centre around the environmental/social characteristics promoted by the fund. These details must be provided in pre-contractual and periodic documentation.
Characteristics can be expressed in the form of investment policies, goals, or targets. The fund manager must select the particular fund characteristics and provide detail on how these are attained. Sustainability indicators must therefore be defined, in order to measure these characteristics. The EC recommends the use of relevant principal adverse impact indicators ( PAIs ) to act as sustainability indicators. For more information on the PAIs, head to our previous blog on 'Introducing the Principal Adverse Impacts ( PAIs )' and download the Full List of PAIs we have put together. PAIs provide objective, comparable measures that can be tracked over the lifetime of the portfolio. These protocols are also easy to implement, as they are already required for other SFDR disclosures.
When defining an Article 8 fund, the use of the term “promotion” can be widely interpreted. In 2021, the EC clarified that promotion can encompass claims, information, reports, disclosures, or even impressions that portfolio assets consider the prescribed environmental/social characteristics.
The Commission goes on to list a wide range of document types in which these “impressions” could be stated. (Click here for the full list). The range of possible disclosures has become a cause for confusion for fund managers. For example, one suggested format for promoting environmental/social characteristics is an exclusion policy relevant to these characteristics. This could involve the exclusion of coal-generated power, for instance. However, it is unclear how the PAIs can track progress towards this “characteristic”.
Article 8+ funds: The promotion of environmental and/or social characteristics with a minimum commitment to making sustainable investments
There has been a general market consensus that Article 8 classification requirements in their current form are not sufficiently stringent. This has led to a wide range of financial products, all self-classified under Article 8.
These range from funds with minimal exclusion policies to funds defining their investment strategy according to environmental or social concerns. In response to this, the concept of Article 8+ funds was developed by the financial sector, rather than the regulators. Article 8+ funds (or mid-green funds) differ from Article 8 funds (or light-green funds) in that a proportion of the portfolio must be classified under “sustainable investments”, as defined by the SFDR.
There are the three key requirements for this type of investment:
- Contribution to an environmental or social objective.
- Compliance with the “do no significant harm” principle (for which disclosure of the PAI indicators is required).
- Adherence to “good governance” (discussed later).
For Article 8+ funds, a classification process must be embedded into pre-contractual and periodic disclosures to determine whether or not portfolio assets classify as sustainable investments under SFDR regulation. Fortunately, there is significant overlap between sustainable investment classification and alignment with the EU Taxonomy. Given the detailed technical screening criteria available to assess Taxonomy alignment (discussed in a previous blog in the SFDR series), the process of classifying an investment as sustainable is made easier if the activity falls within the Taxonomy.
Article 9 funds: The objective of the fund is sustainable investment
Now that the distinctions between Article 8 and 8+ funds have been outlined, it is relatively easy to establish the requirements for Article 9 fund classification. As discussed, Article 8+ funds differentiate themselves from Article 8 funds by containing a proportion of “sustainable investments” in their portfolio.
Article 9 funds take this one step further by requiring that all assets be sustainable investments (with certain exceptions related to hedging or liquidity). As such, additional disclosures that are required for Article 9 classification take a similar form to Article 8+ disclosures, with the additional requirement that investments are exclusively classified as sustainable.
Disclosures required for all Article 8, Article 8+, and Article 9 classifications
Website disclosures.
Though there will be some variation between Articles 8 and 9, the information that must be published on the fund manager’s website is similar for both fund types. Both in terms of content and format. Website disclosures overlap with the pre-contractual disclosures described above, as well as further detail regarding data management and due diligence processes.
Consideration of the PAIs
All funds regulated under SFDR must detail, in both periodic and pre-contractual documentation, how the principal adverse impacts on sustainability factors are considered. Beyond an explanatory disclosure, fund managers are encouraged to use quantifications in the form of the PAI indicators.
Technically, consideration of the PAIs is a firm-wide disclosure. However, in May 2022, the EC clarified that the PAI indicators could be applied to individual financial products, without the requirement for firm-wide compliance.
Fund alignment
Both Article 8 and 9 funds require disclosures detailing fund composition, presented in the form of investment proportions. This is intended to provide investors with a clear understanding of the fund’s profile.
Article 8 classification requires the disclosure of the proportion of investments aligned with its promoted characteristics, and both Article 8+ and Article 9 classifications require the disclosure of the proportion of investments aligned with environmental/social objectives, as well as Taxonomy alignment.
Good governance practices
A final requirement for both Article 8 and 9 classification is the implementation of a screening policy to ensure that all portfolio companies practice good governance. It is worth emphasising that this does not apply to other asset classes, such as real estate assets.
The RTS states that this policy should broadly cover sound management structures, employee relations, remuneration, and tax, but this is not further defined. Once again, this leaves this requirement largely open to the interpretation of fund managers. We recommend that policies are drafted with the portfolio companies in mind to ensure relevancy. Possible starting points for drafting this policy can be found in the OECD Guidelines for Multinational Enterprises .
Fund labelling
It is worth noting that only Article 8+ and 9 funds can use the term “sustainable” in the fund name. Similarly, the terms “impact” and “impact investing” should only be used by funds that intend to generate measurable and positive social/environmental impact.
To conclude
As further SFDR clarification is provided, and as ESG measurement regulations continue to evolve, every asset manager must take action to adapt to these changes. Managers and investment decision makers that fail to integrate these new rules in their business plan risk failing to meet European - or even global - standards.
ESG management is an emerging topic, and governing bodies are responding to calls for further clarification. We review and report on every new update in the field to help market participants better understand sustainable finance. Follow our SFDR blog series to find out more.
Contact us for more information on how our intuitive software can further streamline regulatory adherence.
The SFDR Blog Series continues...
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European investors are struggling to understand new rules designed to confirm the environmental, social and governance (ESG) credentials of portfolios. Since regulatory guidelines are vague, asset managers must provide a clear framework to show how their products fit sustainable investing classifications.
The EU’s Sustainable Finance Disclosure Regulation (SFDR) aims to improve transparency about the ESG features of investment portfolios by having firms classify them as Article 8 or Article 9 products. However, definitions of Article 8 and 9 are quite broad. When SFDR’s level 2 requirements take effect in January 2023, firms will need to provide more details explaining portfolio alignment with these categories. To decipher the disclosures, investors should focus on three issues: how ESG research is integrated in investment processes, what applicable engagement activity is conducted with issuers and whether a clear methodology is applied to classify portfolios.
Integrated ESG Research Paints a Complete Picture
Under SFDR, Article 8 portfolios should promote, “environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.” But what does this really mean?
We believe investors must integrate ESG issues in fundamental research to assess company behavior and risk/return potential. Fundamental analysts, who are immersed in a company’s business and financials, can best judge how ESG issues affect the outlook, and how a company is (or isn’t) evolving to promote positive change.
What threats does a company face from climate change? Does corporate culture support innovation and growth? Is the board truly diverse? Analysts who are familiar with a company can ask the right questions and draw the most meaningful ESG conclusions.
Many firms use third-party ESG ratings to evaluate companies. These may not capture the full picture. Ratings often reflect a company’s past behavior and not whether it is changing for the better. For ratings to be useful for investors, ESG analysis requires informed human judgement and interpretation.
When assessing an Article 8 portfolio, check whether it relies mostly on third-party data to evaluate companies. Find out whether analysts have been trained to tackle ESG issues. And ask investment teams to explain how they generate ESG research insights.
Engagement for Insight and Impact
Insight into ESG issues is hard to glean from company reports. Direct discussions with companies on thorny issues help determine whether a business is on the right track.
Engagement is also a powerful tool for influence. Buying stocks or bonds in public markets doesn’t make a direct financial impact, unlike investors who provide primary capital to fund specific projects. But active managers can wield influence as an owner, encouraging management to make improvements that benefit stakeholders—from customers to employees to communities—and support shareholder returns.
Investors are increasingly speaking out on ESG issues and companies are responding. For example, average shareholder support for environmental proposals at US companies jumped to 42% in the first half of 2021 from 31% a year earlier, Glass Lewis reports. Some 57% of Fortune 100 companies disclosed greenhouse gas emission reduction goals in their 2021 proxies, up from just 35% in 2020.
When evaluating an Article 8 portfolio, examine its engagement practices as a sign of true commitment to ESG issues. Portfolio teams with a robust engagement strategy benefit from ESG research advantages while playing an important role in shaping corporate behavior.
Consistent Methodology Helps Deliver Better Outcomes
In our view, Article 8 and 9 portfolios should actively integrate ESG issues in the investment process, with consistent and repetitive procedures backed by formal methodology. When evaluating securities, portfolio managers and analysts should first determine what ESG issues are material to a company’s business. Related risks and opportunities must be identified, assessed and incorporated in investment decisions. And when fundamental company analysts partner with subject matter ESG specialists, insights from their combined expertise can bolster high-conviction sustainable positions.
It’s also important to document research and engagement activity. In our Article 8 and 9 portfolios, we keep track of strategic and active engagement and voting, which aim to develop research insight and prompt action. We encourage management to make decisions with a long-term view that supports positive, sustainable financial outcomes for the company, its stakeholders and our clients. In 2021, AB portfolio teams conducted 1,566 ESG engagements with 1,091 companies on dozens of ESG topics from carbon emissions to employee health and safety to executive pay.
Technology also helps facilitate independent assessments. With ESIGHT, our research and collaboration tool, analysts can access ESG research notes, proprietary scoring and engagement information of other AB analysts and investment teams, as well as tap third-party data. PRISM, our fixed-income tool, records analysts’ ESG research and scoring, and syncs with ESIGHT. These systems provide quantitative evidence for assessing whether a portfolio meets Article 8 classification.
Article 9 portfolios should have “an objective of sustainable investments,” according to SFDR. But there are many ways to define and pursue sustainable investing objectives, and asset managers should clearly articulate how they meet Article 9 criteria. We believe investing in issuers that either contribute to achieving the UN Sustainable Development Goals or are aligned with the Paris Agreement are solid sustainable strategies. Portfolios with an explicitly sustainable agenda must also employ the same robust ESG integration approach as Article 8 portfolios to meet their goals.
For Article 8 and Article 9 portfolios across asset classes, we believe integrating ESG research into security selection processes is the key to success. Engagement with management must focus intensively on ESG issues. ESG integration, ESG scoring and engagement are at the heart of how we classify Articles 8 and 9 portfolios under SFDR. There are no shortcuts to creating ESG-focused portfolios that comply with regulation and investor expectations.
Michelle Dunstan is Chief Responsibility Officer at AllianceBernstein (AB)
Amelia Sexton is Product Manager, ESG Specialist at AB
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.
EU Sustainable Financial Disclosure Regulation (“SFDR”) Classifications made in accordance with and for the purposes of Regulation (EU) 2019/2088 and are not meant to provide exhaustive information on the suitability of the portfolio for a prospective investor’s investment needs.
Michelle Dunstan
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Source: https://www.morningstar.co.uk/uk/news/211061/finding-esg-funds-just-got-easier.aspx. Article 8. Article 9. Morningstar has surveyed a sample of the
Article 6 covers funds which do not integrate any kind of sustainability into the investment process and could include stocks currently excluded by ESG funds
According to JP Morgan Asset Management and Fidelity International, for a fund to be designated as article 8, it must invest at least 50% of its
Article 8 covers products that promote 'E' or 'S' features, regardless of whether the investment outcome is actually made in ESG products or
Article 8 products are those which promote environmental or social characteristics and which integrate sustainability into the investment process in a binding
So, article 8 applies to funds promoting environmental and social objectives and which take more into account than just sustainability risks as required by
Investors use Article 6, 8, and 9 funds as labels. These distinctions help them understand the ESG performance of the funds they are
Article 8+ funds: The promotion of environmental and/or social characteristics with a minimum commitment to making sustainable investments.
The EU's Sustainable Finance Disclosure Regulation (SFDR) aims to improve transparency about the ESG features of investment portfolios by having
The main provisions of the Disclosure Regulation will apply from 10 March 2021. The requirements relating to disclosures in the periodic reports of ESG-focused