London: Fitch Ratings estimates that assets under management (AUM) in money market funds (MMFs) classified under Article 8 (A8) of Europe’s Sustainable Finance Disclosure Regulation (SFDR) reached EUR600 billion at end-2021, or 39% of total European MMF AUM, up from 36% at end-3Q21.
Fitch is aware of a number of planned or pending fund conversions to A8, and therefore expects the A8 share to increase in the near term. A8 funds are defined as funds that promote environmental and/or social factors, provided the companies in which the investments are made follow good governance practices.
Share of AUM classified as A8 varies across Europe with France-domiciled MMFs at 79%, followed by Ireland-domiciled MMFs at 42% and Luxembourg-domiciled MMFs at 17%, at end-2021.The high share of France can in part be explained by the French financial sector’s access to government-sponsored ESG certification, the SRI label, since 2016. To achieve the SRI certification, fund managers must disclose their ESG methodology and specific ESG indicators, demonstrating their familiarity with ESG disclosure requirements.
Fitch expects heightened regulatory scrutiny, particularly on funds mis-classifying their ESG approach (referred to as greenwashing), despite the postponement of the European Supervisory Authorities’ Regulatory Technical Standards to January 2023. For example, the European Securities and Markets Authority’s Sustainable Finance roadmap published in February 2022 is prioritising the issue of greenwashing with a focus on coordinated action.
While a fund’s classification under SFDR is not directly relevant to ratings, mis-classification or regulatory sanction could affect ratings should these events lead to material outflows affecting fund liquidity.