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The darker the shade, the greener the investment - but it’s a high bar

Investors who want to do the right thing should be aware that ‘dark green’ funds put purpose before return

Sometimes just being green is not good enough. The shade counts as well. For most people, green investments that conform to the rules set out in article 8 of the EU Sustainable Finance Disclosure Regulation (SFDR) will do just fine but others want it darker.

Article 8 funds “need to consider environmental and social factors and often tilt their investments by holding more in companies that have better ESG characteristics, excluding certain companies and engaging with the companies that they invest in,” explains Peter Smith, investment director with Aviva Investors.

But for those who want to be even more virtuous there are ‘dark green’ or article 9 funds. In a nutshell, these funds put purpose first and returns second. And you can’t get much more virtuous than that.

An article 9 Fund under SFDR is defined as a Fund that has sustainable investment or a reduction in carbon emissions as its objective. Where they target carbon emissions, they must measure themselves against internationally recognised benchmarks such as the Paris Agreement or the EU taxonomy.


However, the need to track these benchmarks as well as to exclusively pursue sustainability objectives has led to a rethink on the classification by many fund managers in the recent past. Indeed, it wouldn’t be overstating the case to say that there has been a flight out of article 9 funds and into the less onerous article 8 classification.

According to US investment research and management firm Blackrock, asset managers downgraded funds holding a total of €175 billion in assets from article 9 to article 8 classification in the last three months of 2022. Overall, 307 switched from article 9 to article 8, accounting for 40 per cent of the dark green category.

Morningstar analysts expect that trend to continue and have even gone as far as to question the usefulness of the article 9 category for investors in future.

“Article 9 sets the bar very, very high,” explains Davy chief investment officer Donough Kilmurray. “A lot of fund managers described funds as article 9 but then had to row back. Article 8 still demonstrates that you are doing something on the sustainability side.”

There hasn’t necessarily been a drop in demand for dark green products, he adds. “They haven’t really fallen out of favour. It’s a case of some manufacturers not being aware of how high the bar is for them. Clients are still there for them but they have to understand what they are putting first, performance or return. You tend to get much better outcomes if people are clear about what they are buying.”

Barry McCall

Barry McCall is a contributor to The Irish Times