Performance and Strategy Across 27,000 Article 6, 8, and 9 Funds
For socially responsible investors seeking to invest in companies that align with specific environmental and social goals, Article 9 funds (commonly referred to as dark green) have been a popular choice in the past. However, these funds have become increasingly scarce as we witnessed a wave of Article 9 downgrades, resulting in a catch-all Article 8 category. Article 8 products are known for promoting environmental and social characteristics (also referred to as light green). In contrast, Article 6 products do not have a sustainability scope. While the different categories may seem straightforward, it can be difficult to discern what is included within each as not all funds are created equal. Clarity AI has analyzed 14,000 Article 6 funds, 12,000 Article 8 funds and 1,000 article 9 funds to identify differences in performance and strategy.
We first looked at whether asset managers were using SFDR’s mandatory Principal Adverse Impact (PAI) indicators in their investment strategy when creating financial products. The results of our analysis showed expected differences and unexpected similarities across the three product categories. As anticipated, the prevalence of PAIs in investment strategy is less common in Article 6 funds, with less than one in three using them. However, almost all Article 8 funds consider mandatory PAI indicators in their investment strategy, similar to the trend found for Article 9 funds. Further analysis revealed that Article 9 funds on average consider more PAI indicators in their investment strategy than Article 8 funds (14.4 vs. 10.7).
Our research revealed that PAIs are not solely used for reporting purposes, but are in fact an integral part of the investment process. However, it’s important to note that not all investment products utilize the same PAIs, and each indicator’s level of popularity varies. It was found that the top three PAIs used by Article 9 and 8 funds were “Exposure to controversial weapons”, “Violations of UNGC principles or OECD guidelines for multinational companies”, and “Exposure to fossil fuels”. These PAIs were also prioritized in article 6 investment strategies. Therefore, it’s imperative for investors to have a full understanding of the PAIs utilized by their preferred investment product in order to make well-informed investment decisions.
After understanding whether asset managers were considering the PAIs in their investment strategies we utilized Clarity AI’s SFDR dataset to compare the performance of different products across various PAIs. Our main question was whether Article 9 funds, which classify their investments as having a significant environmental or social benefit, would outperform Article 8 funds, which simply consider such factors. Overall, our findings indicated that the differences between Article 9 and Article 8 funds across commonly used PAIs in investment strategy were slim and only present in some PAIs. Furthermore, we also discovered that whether asset managers considered the PAIs in their investment strategy had an even smaller effect.
To understand the performance of their funds and the potential to improve, investors must understand what really matters. We compared the effect of three variables on PAI performance: 1) whether the fund was classified as Article 9, Article 8 or Article 6; 2) whether the fund manager reported taking into account the PAI in the investment strategy; 3) and the geographical focus of the fund.
The effect of these variables on PAIs was diverse from 20p.p. when looking at SFDR’s mandatory PAI 13 (“Board Gender Diversity”) to less than 0.1p.p. when looking at exposure to controversial weapons. What matters most also changed from indicator to indicator – while significant differences could be seen based on the SFDR disclosure regime of each fund (i.e., Article 6, 8 or 9) for indicators such as “Exposure to fossil fuels” and “Violations of UN Global Compact principles and OECD Guidelines for Multinational Enterprises,” geographical focus was the only relevant factor for indicators such as “Board Gender diversity.”
Overall, Clarity AI’s analysis of 27,000 funds revealed that there are significant differences in performance and strategy related to the SFDR PAIs. These differences are affected not only by the SFDR categorization of the fund but also by other fund characteristics, such as its geographical focus. Investors should take the time to research and evaluate different options in order to find a fund that aligns with their investment goals and values.
The increasing popularity of Article 9 funds is a positive sign that investors are becoming more aware of the importance of investing in socially responsible companies. As more investors seek out Article 9 funds, it is likely that the demand for these funds will continue to grow, which could lead to increased innovation and new opportunities for socially responsible investing. Additionally with strong data related to the PAIs, construction of investment products that could be classified as Article 9 is possible.
In conclusion, our analysis underscores the importance of using robust data to compare and understand the differences across funds in order for investors to make informed investment decisions.
