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

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 Regulation of sustainable economic activities, a classification system aimed at clarifying and classifying which investments and economic activities are environmentally sustainable, for which six environmental objectives have been established.

Likewise, on 10 March 2021, the Sustainable Finance Disclosure Regulation (SFDR) entered into force, included in the EU Action Plan on sustainable finance. It aims to achieve greater transparency on the part of financial agents. It establishes standards for the publication of extra-financial information in order to better assess the level of sustainability of financial products. 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 different transparency obligations according to the 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.

Finally, vehicles classified as article nine are products with a primary focus on sustainable investment, those which have a positive environmental and social impact that must be explicitly defined. This article covers the most sustainable funds, so the demands of disclosure 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.

Demand for these products has not stopped rising in recent years. In 2022 the volume of sustainable investment in Spain stood at almost 375,000 million euros, which represents 55% of the market, according to the report ‘Sustainable and responsible investment in Spain’, published by Spainsif, an association that promotes this type of investment. Although the percentage has increased, from 51%, the total volume is slightly lower, due to the outbreak of the war in Ukraine and the energy crisis it caused, explains Spainsif.

“This situation cannot serve as an excuse for neglecting the application of these criteria when making investment decisions. What’s more, they should be even more relevant for portfolio construction with a strategic vision,” comments Eduardo Ripollés, director of institutional sales at MAPFRE AM.
In fact, Ripollés believes that in recent years “the criteria, metrics and objectives have been consolidated”, 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.

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.

 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 three vehicles classified as article nine, LFR Europe Développement Durable ISR, LFR Inclusion Responsable ISR and LFR Actions Solidaires ISR.

Recently, MAPFRE AM has classified three more funds as Article 8: MAPFRE AM European Equities, European equities; MAPFRE AM Iberian Equities, with a focus mainly on Spanish equities; and MAPFRE AM Good Governance, which incorporates companies with the best corporate governance in its portfolio, thus joining MAPFRE AM Capital Responsable and MAPFRE AM Inclusión Responsable, which were already classified as Article 8, and the MAPFRE Energías Renovables II, FCR fund, classified as Article 9.

In addition, work is also underway to achieve Article 8 (SFDR) classification for the MAPFRE AM Global Bond Fund, which was born from the merger of two funds at the beginning of 2021, the MAPFRE AM Global Bond Fund, a global fixed income fund, and the Capital Investment Spain International Fund, managed by Amundi exclusively for MAPFRE companies since 1993.

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