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Sustainable investments: what it means for a fund to be Article 8 or 9

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Environmental, social and governance (ESG) criteria have become one of the most in-demand megatrends among investors in recent years, although it is not always easy to define which companies meet or do not meet the requirements to be considered sustainable. This is especially the case for social investments, as it is difficult to analyze the impact of a company or policy on a specific community.

In fact, there is major confusion between the different concepts related to this type of investment, which, in many cases, are used interchangeably despite not being exactly the same. This would be the case of responsible, sustainable and impact investments, for example.

With a view to organizing these classifications, in June 2020 the European Union (EU) approved the taxonomy of sustainable economic activities, a guide that “helps investors and companies to identify which projects (adversely) affect the climate and the environment”, as explained by the EU on its website.

Likewise, on 10 March 2021, the Sustainable Finance Disclosure Regulation (SFDR) entered into force, included in the EU Action Plan on sustainable finance. The standard applies to all European financial institutions and its objective is for them to classify mutual funds according to the sustainable profile of each company in which they invest.

It establishes a classification broken down into three articles. The vehicles under article six have no sustainability objectives. This section may include funds that have not had ESG considerations in the investment decision-making process, as well as those that include companies from sectors that are currently excluded, such as tobacco or coal mining.

Those classified under article eight are those that “promote sustainable activities”, in other words, they invest in economic activities that promote the environmental and social characteristics set out in the prospectus, although it is also open to investing in companies that do not meet the ESG criteria.

Finally, vehicles classified as article nine are vehicles that have a positive environmental and social impact that must be explicitly defined. This article covers the most sustainable funds, so the demands are also higher: they must explain what their investment goals are, how they intend to achieve the stated results and how they will measure these results through sustainability-related metrics.

However, the regulations in this field do not seem to be helping to promote sustainable vehicles enough, given the difficulty of measuring the impact of each investment.

“One factor that does not end up supporting sustainable funds are the regulations. Although still in its infancy, taxonomy and classification is drawing a lot of criticism and a lot of work remains to be done in the field. In fact, there are aspects, such as the expected social taxonomy, that are very difficult to define and apply in practice,” says Alberto Matellán, chief economist at MAPFRE Inversión.

Investors want to invest in sustainability

Demand for these products has not stopped increasing in recent years. In 2021, the volume of sustainable investment in Spain stood at 485.8 billion euros, accounting for 65% of the market and 10% up on the previous year, according to the report “Sustainable and responsible investment in Spain”, published by Spainsif.

From this amount, Spanish entities accounted for 317.3 billion euros, 67% of the domestic market. The association, which promotes sustainable investment, explains that the 2022 figures will be impacted by the outbreak of the war in Ukraine and the energy crisis that this triggered.

“This situation cannot be used as an excuse to disregard the application of these criteria when making investment decisions. Moreover, they should be even more relevant for portfolio construction with a strategic vision” asserted Eduardo Ripollés, institutional sales director at MAPFRE AM.

In fact, Ripollés considers that 2022 has served to “consolidate the criteria, metrics and objectives”, while continuing the process to establish solid and consistent regulations that helps investors, providers and advisers establish a common scope of action.

Matellán added that investors have become much more demanding with managers. “Customers ask for much more information and sophistication. Now it’s not enough to just say you’re sustainable, you have to demonstrate to the customer that you are and how you go about it. What’s more, this sophistication translates into the fact that the customer is not satisfied with a mere filter, they want to verify that there is a real process for examining sustainability issues, i.e., integration”, he highlighted.

Improved results

In terms of the results of these mutual funds, the chief economist at MAPFRE Inversión offered a reminder that they cover a huge range of different strategies. However, the more integrated the funds are in the process, the better they will resist negative moments, as well as scares or scandals affecting companies.

“It’s important for processes to be integrated gradually. In other words, non-financial information is integrated with financial information in a single process and they are not two different and separate things, which end up generating confusion. This is the idea that we have been working toward at MAPFRE for some time: sustainable investment makes us better understand where we put our money, and therefore makes us better investors”, defended Matellán.

Likewise, thematic funds seem to show better results than generic funds, a view that MAPFRE shares. “We have a thematic fund dedicated to people with disabilities that is among the most profitable in our fund portfolio,” said Matellán, referring to the MAPFRE AM Inclusión Responsable Fund.

Conversion of funds to Articles 8 or 9

Progressively more asset managers have decided to make changes to their mutual funds to adapt them to the requirements of the SFDR for article eight and, to a lesser extent, article nine. MAPFRE is taking a prudent approach in this regard, working in such a way that all of its sustainable products and services grow, and with this in mind, it has increased its stake in the capital of the French asset manager La Financière Responsable (LFR) to 51%.

“Since 2017, we have been committed to sustainable investment, and LFR has nearly 25 years of experience in this industry. In the past five years, we have launched SRI products jointly, which have the peculiarity of having their own methodology for the final selection of the securities that make up the funds’ portfolios, something that is highly recognized by our clients,” said José Luis Jiménez, MAPFRE’s group chief investment officer.

LFR has two vehicles classified as article nine, LFR Europe Développement Durable ISR and LFR Inclusion Responsable ISR, while LFR Actions Solidaires ISR is article eight.