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Money managers lower ESG ratings of billions in funds

The development is embarrassing for the EU, whose efforts to race ahead of the rest of the world with its ESG investing rulebook are showing signs of backfiring

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Amundi and Deutsche Bank's DWS Group are downgrading billions of dollars worth of ESG funds, adding to the sense of disarray that's spreading across Europe's asset management industry as it digests stricter regulatory guidance.

Amundi is reclassifying almost all funds listed under the EU's top ESG category, known as Article 9, a spokesperson for Europe's largest asset manager said.

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 conservative approach" as Amundi tries to adapt to the EU's evolving regulatory environment, the person said.

Amundi had almost €45bn in Article 9 products at the end of October, according to data compiled by Morningstar Direct and confirmed by Amundi. A DWS spokesperson said its downgrades affect about €2bn in fund assets. Morningstar expects that at least $85bn (€82.5bn) in industry-wide Article 9 funds will have been downgraded within the coming weeks and months.

"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, said.

Asset managers are purging their portfolios of the once-coveted Article 9 designation, amid growing confusion surrounding the EU's anti-greenwash rulebook, the Sustainable Finance Disclosure Regulation (SFDR).

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, Axa Investment Management, Pacific Investment Management and Goldman Sachs Group's NN Investment Partners.

The upshot is that Article 8 is set to grow in assets under management, while Article 9 will be much smaller, Ms Bioy said. That has the potential to anger clients who thought they'd allocated money to Europe's top ESG category, only to find that's no longer the case. The development is also embarrassing for the EU, whose efforts to race ahead of the rest of the world with its ESG investing rulebook are showing signs of backfiring.

"Clearly, it means that the Article 9 fund category will shrink, both in terms of number of funds and assets under management," Ms 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 100pc 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.

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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."


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