Dark green funds saw their lowest flows on record throughout the second quarter of 2023, despite sustainable fund assets passing the €5trn mark for the first time.
Assets in Article 8 and Article 9 funds rose by 1.4% over the quarter, despite the former losing €14.6bn in outflows, while the latter raised their lowest inflows (€3.6bn) since the introduction of SDFR in 2021.
Data from Morningstar's SFDR Article 8 and Article 9 Funds: Q2 2023 in Review report revealed that despite the poor inflows, Article 9 funds saw the best performance of any SFDR classification, rising 1.2% organically throughout the quarter,.
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The report noted a "stronger presence of passive strategies" in sustainable funds over the last quarter, with the Article 8 Goldman Sachs Enhanced Index Sustainable Global Equity fund gaining €3.2bn alone.
Morningstar also said the outflows from Article 8 funds "disproportionally affected the Article 8 funds with no commitment to sustainable investments", with one third of outflows coming from such funds.
The report also found that reclassifications of funds, which surged following new guidelines over SFDR, had slowed, with only six funds downgrading from Article 9 to Article 8 throughout the quarter, while 180 funds upgraded from Article 6 to Article 8.
In total, almost half of all funds launched in the EU throughout Q2 were Article 8 or 9, with 161 funds being launched across the three months.
Morningstar said the number of launches showed "little change" from the previous quarter but warned of a potential period of "continued slowdown in product development activity".
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Another emerging trend has been the development of sustainable investment definitions and measurements in portfolios, with 190 Article 8 funds updating their minimum sustainable investment allocations throughout the quarter.
Meanwhile, almost 600 Article 8 and Article 9 funds now report a carbon reduction objective.
Hortense Bioy, global director of sustainability research at Morningstar, said: "Despite the continuously challenging macro environment and the net outflows, assets in Article 8 and Article 9 rose over the second quarter.
"Funds claiming some degree of greenness passed the €5trn milestone for the first time, driven by newly launched funds, product upgrades and, to a lesser extent, market appreciation.
"Meanwhile, asset managers continued to provide more information about the negative effects of their investments on the planet and society.
"They just started to disclose principal adverse impacts (PAIs) at entity-level. PAIs are a cornerstone of SFDR, but their implementations remain a challenge, not least because of a lack of standard data and methodologies."
