A common framework of sustainability targets by 2030
The EU has set ambitious sustainability objectives by 2030 with the aim to contribute to the UN Agenda 2030 for sustainable development and the 17 sustainable development goals (SDGs). However, there is a significant annual investment gap in order to meet these targets. To bridge the investment gap, the EU devised an action plan for sustainable finance regulation. As a result, the financial sector is likely to reallocate more capital flows towards sustainable investments and foster transparency for investors to help identify, which investments contribute to the EU’s sustainability objectives.
Light green and dark green sustainable financial products
A key component of the EU’s action plan is the introduction of disclosure rules for financial products and how they consider sustainability risks and if they have sustainability objectives. The resulting Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants and financial products to disclose sustainability-related information and investment policies. It aims to prevent greenwashing by creating a systematic approach to sustainable investing and ensuring transparency for investors. As a result, the SFDR introduced a self-classification on how funds consider sustainability aspects, outlined below:
- SFDR Article 6: Not sustainable funds and consider only very limited ESG risks in the investment process.
- SFDR Article 8: “Light green” funds and consider sustainability risks in the investment process and promote environmental or social characteristics.
- SFDR Article 9: “Dark green” funds and consider sustainability risks in the investment process and have a specific sustainability objective in addition to financial objectives by contributing to environmental or social objectives.
An EU definition of sustainable investments
SFDR also introduced a definition of “sustainable investments”. They are described as an investment into economic activities that considers a contribution to an environmental or social objective. Provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices.
Disclosing negative effects to environment and society
Additionally, SFDR introduced a disclosure of sustainability risk-based indicators on a variety of environmental, social and governance aspects where financial products will have to show, if the investments into an investee company will have negative or adverse impacts. These so-called Principal Adverse Impacts or PAIs, are a set of indicators, will have to be disclosed how they are considered in the investment process.
SFDR Article 8 and 9 assets surpass 50% market share
Many market studies have shown large growth of sustainable assets and now becoming mainstream. According to research from Morningstar, together the SFDR Article 8 and Article 9 funds have surpassed 50% of the market share in Europe. However, the “dark green” Article 9 funds only account for 4.3% of the total market share of funds.
The EU sustainable finance regulation can help combat green washing by increasing transparency for investors. They now have a clear choice of what shade of green they want to aim for, only better portfolios with “light green” Article 8 or contributing to sustainability objectives with “dark green” Article 9 funds.
For us at radicant bank (radicant), the answer is clear, as we only have “dark green” funds.
radicant introduced three dark green SDG-aligned funds
With the UN Agenda 2030 in mind and the aim to contribute to the Sustainable Development Goals (SDGs), radicant has introduced three “dark green”, the “SDG Impact Solutions Funds”, encompassing Swiss Sustainable Equities, Global Sustainable Equities and Global Sustainable Bonds.
radicant leverages its SDG Impact Rating for meeting SFDR classification
The radicant SDG Impact Solutions Funds are classified as Article 9 according to SFDR and they have a sustainability objective to be net positive based on radicant’s own SDG Impact Rating. According to radicant’s sustainability analysis, an investment is considered sustainable according to SFDR, if it meets the criteria of the exclusion guideline for controversial business practices or products (e.g. weapons, tobacco, fossil fuel production). Furthermore, investments are not made in emitters that violate recognised international standards (e.g. UN Global Compact, International Labour Organisation). The aggregated SDG Impact Rating score is equal to or higher than 20 on a scale from -100 to +100. It is determined by a score for each company based on its contribution to the 17 SDGs in the categories of alignment of products and services with the SDGs (e.g. wind power and waste management have a high impact), the contribution of operational indicators to the achievement of the SDGs (e.g. CO2 emissions, gender ratio) and if there are any controversies related to the SDGs. As a result, the individual SDG scores are aggregated to the overall Net SDG Impact Rating score. Additionally, it is checked if there is no significant violation of another sustainability target.
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 Morningstar Manager Research Services, “SFDR Article 8 and Article 9 Funds: Q2 2022 in Review”, 28 July 2022