(Bloomberg) -- BlackRock Inc. is removing Europe’s top ESG designation from a string of exchange-traded funds, after the EU provided updated guidelines to the asset management industry.

The so-called Article 9 classification will be stripped from 17 ETFs, BlackRock said Friday. The funds had $26 billion of combined assets under management at the end of September, the firm said.

The world’s largest asset manager is the latest to be ensnared by adjustments to Europe’s ESG investing rulebook, known as the Sustainable Finance Disclosure Regulation. SFDR was enforced in March 2021, but the EU has since clarified its rules to require that the Article 9 designation be reserved for funds with 100% sustainable assets, with allowances for hedging and liquidity. That’s a higher threshold than many in the industry had anticipated. 

Other firms downgrading Article 9 funds include Goldman Sachs Group Inc.’s NN Investment Partners, Axa Investment Management, Robeco Institutional Asset Management BV, Pacific Investment Management Co., Van Lanschot Kempen NV and Neuberger Berman Group LLC.

The spate of reclassifications has led to criticism of the EU’s ESG rulebook, and even regulators are demanding greater clarity. The requirement that Article 9 funds be filled exclusively with sustainable assets means that firms meeting 80% and even 90% thresholds may also find themselves on the wrong side of the rules. That raises “questions about the feasibility of the new regulatory guidance,” analysts at Morningstar Inc. wrote in a report late last month.

“BlackRock has a robust sustainable investment methodology that is applied to how we classify funds,” Manuela Sperandeo, head of EMEA sustainable indexing in London, said in an emailed comment. 

Despite the confusion around SFDR, the regulatory framework remains fit for purpose, according to BlackRock.

“We strongly support the SFDR and the transparency it provides investors to make informed decisions when selecting products to meet their sustainable investment objectives,” Sperandeo said. 

BlackRock’s ETFs will be reclassified under the less stringent SFDR category known as Article 8, and include iShares MSCI EMU Paris-Aligned Climate UCITS ETF, iShares MSCI USA ESG Enhanced UCITS ETF and iShares Smart City Infrastructure UCITS ETF. 

The likelihood of fund withdrawals as a result of the change in SFDR designation is low, given that only a “low, single-digit” number of clients are tracking such classifications, according to a person familiar with the matter.

BlackRock said in a regulatory statement that the decision to reclassify was based on new, more detailed regulations under SFDR that will come into effect Jan. 1 and recent regulatory guidance. The changes are generally effective Dec. 1, and won’t affect the funds’ objectives or their benchmarks.

Two of the funds track benchmarks that comply with criteria established by the EU for climate transition and Paris-aligned indexes. That means funds must meet annual reduction targets to align with the Paris climate accord and its key goal of limiting temperature gains to 1.5C.

BlackRock also reclassified its iShares Global Water UCITS EFT to Article 8 from Article 6. The lowest category, Article 6 requires only consideration of ESG factors.

(Updates with comment on likelihood of withdrawals in 10th paragraph)

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