SFDR Article 8 Funds Netted the Highest Inflows in Three Years. What’s Behind Their Growth?

Under the Sustainable Finance Disclosure Regulation, EU asset managers must provide more information on sustainability risks and the impact of investment products. The level of disclosure depends on a product’s classification as an Article 8 or Article 9 fund.

In the third quarter of 2024, “light green” Article 8 funds netted about EUR 38 billion of new money, the highest inflows since late 2021. But these pale in comparison to Article 6 inflows, which reached EUR 96 billion in the last three months. In contrast, “dark-green” Article 9 funds bled money for the fourth quarter in a row.

What’s behind this trend?

Our researchers dissected Article 8 and Article 9 funds with Morningstar’s climate data.

For more in-depth analysis, download the free SFDR funds report.

Article 8 funds promote environmental or social characteristics. Holdings should generally help attain the environmental or social characteristics promoted.

Funds that promote an environmental characteristic must additionally disclose alignment with the EU Taxonomy of Sustainable Activities. These funds also must indicate if they invest a proportion in environmentally sustainable investments.

All Article 8 and Article 9 products must disclose if they consider Principal Adverse Impact indicators. These capture the potential negative impact of financial products on:

• Environmental, social, and employee matters.
• Respect for human rights.
• Anticorruption and antibribery matters.

The Sustainable Finance Disclosure Regulation outlines 64 indicators. Of these, 14 are currently mandatory (on a comply-or-explain basis) for corporate investments:

• Greenhouse gas emissions.
• Carbon footprint.
• Greenhouse gas intensity of investee companies.
• Exposure to companies active in the fossil fuel sector.
• Share of nonrenewable energy consumption production.
• Energy consumption intensity per high impact climate sector.
• Activities negatively affecting biodiversity-sensitive areas.
• Emissions to water.
• Hazardous waste ratio.
• Violations of the UN Global Compact principles and Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises.
• Lack of processes and compliance mechanisms to monitor compliance.
• Unadjusted gender pay gap.
• Board gender diversity.
• Exposure to controversial weapons.

Two are mandatory for sovereign and supranational issuers:

• Greenhouse gas intensity of investee countries.
• Number of investee countries subject to social violations.

And two are mandatory for real estate assets:

• Exposure to real estate assets involved in the extraction, storage, and transport of fossil fuels.
• Exposure to energy-inefficient real estate assets.

In the third quarter of 2024, Article 8 funds netted about EUR 38 billion of new money. Inflows notched an increase over the restated EUR 26.5 billion in the second quarter.

But these pale in comparison to inflows into Article 6 funds, which don’t promote any ESG characteristics. Article 6 funds brought in EUR 96 billion last quarter after garnering almost EUR 66 billion in the restated second quarter.

Almost all the growth in Article 8 fund flows came from fixed-income investment funds, which racked up inflows across all SFDR classifications in 2024. Article 8 bond funds attracted EUR 45 billion in the third quarter.

In comparison, flows into Article 6 fixed-income products collected EUR 39 billion.

These recent trends could be explained by a few reasons:

• Improving economic prospects and market price appreciation. For context, both the Morningstar Global Markets Index and the Morningstar Global Core Bond Index gained 6.6% and almost 6.9%, respectively, in the last three months.
• Slower-than-expected declines in inflation. With a less-hawkish pace of interest rate cuts, investors rushed to lock in some attractive yields that offer downside protection against price changes.
• Evolving regulations. In the European Union, the outlook for SFDR looks uncertain. We expect changes to the sustainable funds universe to intensify in the coming months ahead of looming deadlines for new antigreenwashing regulations, including the EU’s fund naming rules.

At the end of the third quarter of 2024, Article 8 funds made up most of the European Union fund universe.

Article 8 funds’ market share declined slightly to 56% from 57.6% three months earlier. SFDR reclassifications dried out—only 10 funds changed their SFDR product type, the fewest since the regulation was introduced in 2021. Measured by number of funds, the Article 8 category held steady at 45.9% of the market.

About 166 new SFDR Article 8 funds launched in the third quarter of 2024. The slowdown in product development over the past few quarters goes beyond Article 8 and Article 9 funds. Firms also launched fewer Article 6 funds, partly due to the uncertain macro environment. In the third quarter, newly incepted Article 8 and Article 9 funds accounted for 56% of the total number of funds launched in the EU.

The amended MiFID II directive requires financial intermediaries to consider clients’ sustainability preferences when assessing suitability. If clients express interest in sustainable investments, they must accommodate.

The European ESG template, or EET, supports this process. As of September 2024, Morningstar had collected EET data on 75.4% of all share classes in the scope of MiFID II. These represent 22,612 funds, including 11,475 Article 8 funds.

Morningstar Direct covers key European ESG template data points, including:

• SFDR minimum or planned sustainable investments. This represents the minimum percentage of portfolio investments deemed sustainable but not taxonomy-aligned.
• SFDR minimum or planned taxonomy-aligned sustainable investments. This represents the minimum percentage of the portfolio that aligns with the EU Taxonomy.

Today, close to two-thirds of Article 8 funds commit to making some sustainable investments. The number of Article 8 funds with 0% values reached over 3,533 at the end of September, a marginal increase over last quarter.

However, more Article 8 funds, about 75%, report making sustainable investments. This suggests that fund managers are cautious with their precontractual commitments.

For a more detailed breakdown, download the Article 8 and 9 research report. The full report covers:

• Top 20 asset managers by Article 8 fund assets.
• The 20 largest Article 8 funds.
• The asset class mix of Article 8 funds.
• The 10 Article 8 funds with the highest inflows and outflows.