The European Union continues working on its European Green Deal, aiming to be the first “climate-neutral” continent by 2050. This also includes the Action Plan for a more ecological and clean economy, published by the European Commission in March 2018, with a roadmap to enhance the role of finance in achieving environmental goals.
In this context, closed-end alternative investment funds (CIFs) are a key instrument for channeling finances into sustainable activities. This is due to the large investment volume these vehicles mobilize, as well as their long-term investment strategies.
However, one of the main challenges these funds face is legislative pressure, especially when they are labeled as sustainable, green, ESG, or similar. According to the Sustainable Finance Disclosure Regulation (SFDR), CIFs can be classified in three ways: Article 9 funds (which aim for sustainable investments), Article 8 funds (which do not have sustainable investments as their goal but promote social or environmental characteristics), and Article 6 funds (which are neither classified as Article 8 nor Article 9).
Although all funds are required to integrate sustainability risks into their investments, this does not obligate them to make a real contribution to sustainable development, nor are they required to apply environmental, social, and governance (ESG) criteria. This is because the SFDR is a reporting and transparency regulation, which does not compel fund managers and funds to generate a positive impact on sustainability, even for Article 8 or 9 funds.
As a result, European institutions are working towards 2025 to modify existing regulations and establish minimum required impacts, at least to qualify a fund as an Article 9 SFDR fund.
This initiative is important because, after an initial boom in sustainable funds created in 2021 and 2022, a general reduction was observed in 2023, due to the reclassification of many funds from Article 9 to 8, or from Article 8 to 6 SFDR. This reclassification is the result of difficulties faced by fund managers in complying with reporting requirements, particularly for Article 9 SFDR funds, which are subject to more stringent rules.
Additionally, in 2024, sustainable CIFs saw a decline, both in terms of their number and the volume of assets managed. A similar trend was observed in open-end funds, with more withdrawals than inflows, breaking the constant growth trend seen in previous years.
This change could be attributed to external factors beyond the European Union, such as international political instability or even the recent U.S. elections won by Donald Trump. However, it seems more accurate to say that this adjustment (likely temporary) responds to the complexities involved in the constitution and management of sustainable funds rather than external events.
In any case, it is clear that sustainable investment funds are facing both macroeconomic challenges and regulatory complexities. It is expected that between 2025 and 2026, several improvements will be approved to simplify their operations. This could be achieved, for example, by reducing the number of ESG indicators to report, as recently proposed by the European Supervisory Authorities (ESAs).
However, until these legislative changes are implemented, we will continue to see how sustainable funds struggle with reporting difficulties, and how focusing on transparency and reporting harms the generation of real impact on sustainability due to the need to allocate resources to comply with transparency regulations. In this regard, it is worth noting that the vast majority of investment funds focus on reporting the information required by the SFDR, as it is a mandatory regulation to qualify funds as Article 8 or 9 SFDR. However, the factor that truly generates impact on the real economy in terms of sustainable development is the alignment of fund investments with the EU’s environmental taxonomy, which, being optional (even for Article 8 or 9 funds), is currently included in only a minority of funds.
Regarding CIFs created between 2022 and 2024, this alignment involves approximately 10% of assets under management. This percentage is much lower than the 50% of Article 8 and 9 SFDR funds by the number of CIFs and 70% of Article 8 or 9 SFDR funds by the volume of assets managed by CIFs (the vast majority of which are Article 8 funds, not Article 9 SFDR).
Article by Álex Plana, Partner at Across Legal, published by Expansión
