There are only 1,028 Article 9 funds on the market, according to data from Morningstar's SFDR Article 8 and Article 9 Funds: Q3 2023 in Review, representing just 3.7% of all funds on sale.
As such, Bethan Dixon, portfolio manager of Quilter's WealthSelect managed portfolio service, argued the sector "requires much more intensive research", while Seb Beloe, head of research at WHEB Asset Management, noted it has "not been an easy couple of years for Article 9 funds".
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Beloe explained that as sustainable equities typically attempt to tackle "growing problems", the businesses themselves "also tend to be growing relatively quickly", generally being mid-sized firms as "few have yet achieved the scale commensurate with the size of the challenges they are addressing".
Mid-cap growth "has not been a popular style of investment" over the last few years, he said, due to higher interest rates damaging growth companies and market volatility pushing investors towards large-cap safe havens.
Nevertheless, Beloe argued Article 9 funds are likely to enjoy greater investor appeal when a gradual easing of interest rates begins, and as the increasing scale of climate change intensifies.
Daniel Wild, chief investment officer at J Safra Sarasin, also noted that action from policymakers, such as the US Inflation Reduction Act and EU's Green Deal Industrial Plan, are set to push sustainable sectors towards significant growth.
"Specifically, the following sectors are set to post above-average growth (CAGR): carbon capture and storage (14%), automotive semiconductors (24%), electric-vehicle batteries (12%), hydrogen (25%), offshore wind turbines (12%) and smart irrigation (14%)," he said.
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"Famed economist and investor Benjamin Graham argued that, 'in the short run, the market is a voting machine but in the long run, it is a weighing machine'," Beloe added. "Article 9 funds may not be winning votes in the short run, but the long run investment case remains compelling."
However, Wild said that growth-oriented investment strategies may not always be equally attractive across the full market cycle, and "perfect timing can be challenging".
He argued that Article 9 investments should be viewed as satellite allocations with a long-term investment horizon, with core allocations going towards Article 8 funds.
"Opting for the right balance of dark and a paler shade of green may in fact better help the shift towards a decarbonised economy and provide more diversification against near-term volatility," he said.
Pieter Busscher, portfolio manager of Robeco's Smart Materials fund, said that while the EU's SFDR, which created the Article 9 classification, was "never meant to be a labelling regulation", the standards it set in the goal of transparency have evolved it into one.
However, the sector has recently seen a ‘wave of declassifications', with 350 funds downgrading to Article 8 in 2022 amid fears that greenwashing accusations would be levelled against them for investing in non-sustainable businesses.
Busscher gave the example of legacy automobile manufacturers that still have a high share of revenue from internal combustion engine vehicles.
Diving into funds
Quilter's Dixon explained that fixed income funds can be "trickier" to align with sustainable objectives, an issue highlighted by the proportion of Article 9 funds that target equities. More than 70% of these dark green funds are equity vehicles, compared to 50% of Article 8 and 48% of Article 6, respectively, according to the Morningstar report.
For fixed income, Dixon highlighted the Bluebay Impact Aligned Bond fund, which provides exposure to predominantly investment grade credit.
"On the social side, the fund is focusing on achieving an inclusive society, building knowledge and skills and ensuring good health, safety and wellbeing; while on the environmental side, it is about enabling a circular economy, ensuring clean and plentiful water, promoting clean and safe energy and promoting sustainable mobility and infrastructure," she said.
The fund, which launched in May 2021, has returned 3.1% over the last year, compared to an IA Global Mixed Bond average of 1.7%, according to data from FE fundinfo.
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By contrast, Dixon noted the "far greater" availability of Article 9 funds within equities, such as the Columbia Threadneedle SDG Engagement Global Equity fund.
The fund invests in small and medium sized companies that support sustainable development with a focus on driving change through focused engagement aligned to the targets of the UN sustainable development goals.
"Core to their investment process is assessing the degree to which the companies are receptive to engagement, alongside their sustainability and fundamental assessment framework," she said.
The fund has returned 8.1% over the last three years, while the FO Equity - Ethical index has risen 10.7%.
For a more specialist exposure, Dixon pointed to the Candriam Equities L Oncology Impact fund, which invests in companies engaged in the fight against cancer.
The fund has last lost 11% over the last three years, compared to an IA Healthcare average of -5.2%.