Amundi Downgrades ESG Funds as Industry Faces $85 Billion Hit

Amundi Downgrades ESG Funds as Industry Faces $85 Billion Hit

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  • November 21, 2022
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(Bloomberg) — Amundi SA is removing the bloc’s highest ESG designation from virtually all funds that once carried it, as it joins a growing list of investment firms that have been wrong-footed by a change in guidelines from the EU.

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Europe’s largest asset manager is reclassifying “almost all of its range” of funds listed under the EU’s highest ESG category, known as Article 9, a spokesperson for the asset manager told Bloomberg. Instead, the funds will be classified as Article 8, the spokesperson said, referring to the EU’s less stringent environmental, social and governance fund class. The decision reflects a “a conservative approach” as Amundi tries to adapt to the EU’s “still evolving regulatory environment,” the person said.

Amundi had almost €38 billion euros ($39 billion) in Article 9 products at the end of October, according to data compiled by Morningstar Direct and confirmed by Amundi. Morningstar expects that at least $85 billion in industry-wide Article 9 funds will be downgraded within the coming weeks and months, with roughly $70 billion of that likely to be in passive strategies.

“We expect many, if not all, of what we call ‘climate conscious’ and ‘low carbon’ funds to shift from Article 9 to Article 8,” Hortense Bioy, Morningstar’s global director of sustainability research, told Bloomberg.

Amundi is the latest in a growing list of investment firms to purge its portfolio of the once coveted ESG designation, amid growing confusion surrounding the EU’s anti-greenwash rulebook, the Sustainable Finance Disclosure Regulation. Intended as a global gold standard for ESG investing, the framework has been tainted by seemingly endless gaps and inconsistencies that have caught out firms including BlackRock Inc., Axa Investment Management and Pacific Investment Management Co.

The upshot is that Article 8 is set to grow in assets under management, while Article 9 will be much smaller, Bioy said. Morningstar estimated in September that Article 9 funds represent about €470 billion in total.

“Clearly, it means that the Article 9 fund category will shrink, both in terms of number of funds and assets under management,” Bioy said. The designation probably will be limited to “thematic and impact-oriented funds investing in companies that focus on sustainable products and services,” which often tend to be small- or mid-caps, or to “bond funds whose proceeds help finance green and social projects.”

SFDR was enforced in March 2021. But the EU has since clarified key corners of the regulation to require asset managers to reserve the Article 9 designation for funds that are 100% sustainable, save for hedging and liquidity needs. That’s a much higher bar than many had anticipated, and the industry is now in the middle of a protracted correction as fund managers try to digest the change in guidance.

Amundi said its downgrades don’t constitute an acknowledgment that the funds in question are now less sustainable.

The move “in no way calls into question the current level of requirements in terms of the integration of effective ESG criteria and the sustainability characteristics of these funds,” the spokesperson said. “This deliberately cautious approach is in response to Amundi’s concern for protecting investors and distributors from a significant risk of confusion in the allocation of savings.”

Some asset managers had interpreted SFDR rules to mean that using an EU-compliant climate benchmark automatically qualified a fund as an Article 9 product. That’s now far from clear.

“The moving goal posts in the EU have been very tough for the industry,” said Victor van Hoorn, head of European operations at ICI Global.

BlackRock said earlier this month it will downgrade 17 exchange-traded funds classified as Article 9, which will affect $26 billion in assets under management. Many of those ETFs had tracked MSCI climate benchmarks.

MSCI says asset managers are responsible for classifying funds sold in the EU. “We create and calculate indexes to meet the variety of needs of institutional investors,” said Christine Chardonnens, executive director for global ESG and climate Indexes.“Our clients have a range of climate and investment objectives which contribute to their index selection decisions.”

The European Commission has acknowledged that there are differing interpretations and is now looking into addressing the confusion.

“We are aware of the issue,” and “are working in collaboration with ESMA on this,” a spokesperson for the European Commission said in an emailed response to questions.

The European Securities and Markets Authority has said it’s awaiting feedback from the EU Commission on whether using Paris-aligned or climate transition benchmarks qualifies a fund as Article 9.

A third-quarter analysis by Morningstar found that less than 5% of Article 9 funds actually meet the EU’s 100% sustainability requirement.

(Updates throughout to add wider market fallout of changing regulatory guidelines)

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