December 5, 2022

Monday Morning Memo: A Wave of SFDR Reclassifications Hits the European ETF Industry

by Detlef Glow.

Shortly before the Regulatory Technical Standards (RTS) under the Sustainable Finance Disclosure Regulation (SFDR) comes into force on January 1, 2023, the European ETF industry got hit by a wave of reclassifications with regard to categorization of ETFs by the respective SFDR articles.

More broadly, it is not surprising that a number of promoters need to reclassify their funds and ETFs with regard to the SFDR since promoters were missing definitions and clarity on measurements that would assign a fund or ETF to one of the three respective SFDR articles. With the demand to classify their funds prior to the publication of the respective regulatory technical standards, some promoters may have been a bit too optimistic about their ESG credentials and classified their products as high as possible.

After the RTS have been announced, fund promoters realized that the European regulators had much higher demands for products assigned to article 8 or 9 than most industry participants and market observers have expected. In addition, fund and ETF promoters in Europe can expect that the market watchdogs in the EU will put more scrutiny on compliance with the RTS for the respective SFDR article.

Especially in the ETF segment, it was somewhat surprising for the promoters that even ETFs which are tracking one of the two EU climate benchmarks (Paris-Aligned Benchmarks [PAB] and Climate Transition Benchmarks [CTB]) are not automatically qualified as article 9 products. With regard to this, it is no surprise that a number of ETFs that were classified as article 9 products get reclassified to article 8 of SFDR.

In addition, one could see the tighter than expected rules for funds and ETFs to qualify as article 9 funds as an answer of the European regulators on the greenwashing accusations raised by market observers after the final Sustainable Finance Disclosure Regulation has been published in November 2019.

Generally speaking, it was to be expected that a number of funds and ETFs would have to change their SFDR classification once the final rules and guidelines have been published. Nevertheless, these reclassifications are shaking up the respective market statistics and may therefore lead to some confusion up until the end of the first quarter of 2023. In addition to this, the latest proposal of a regulation for the integration of ESG or derived and/or related terms in the fund name will lead to further distortions in the sustainable fund universe.


The views expressed are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

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