What the Label Does Not Say: Defence and Aerospace Holdings in EU Article 8 SFDR Funds

ABSTRACT This thesis examines whether the sustainability label given to Article 8 funds under the EU Sustainable Finance Disclosure Regulation (SFDR) matches what these funds actually hold. Defence and aerospace companies are used as a case study. The analysis starts with Morningstar’s ranking of the 20 largest Article 8 funds and then includes other Article 8 sub-funds managed by the same asset management groups. The final sample contains 125 sub-funds from 13 asset management groups. The holdings of each fund were taken from periodic reports dated between December 2023 and November 2024 and checked against 17 defence and aerospace companies from the STOXX Europe Total Market Aerospace & Defense Index and the Morgan Stanley Global Defence Index. The results show that 118 of the 125 sub-funds (94.4%) hold at least one of the companies, although most hold only a small number. All 18 funds with sustainability-related terms in their names also hold at least one target company. In some fund families, their holdings are also very similar to those of funds without sustainability-related names. Morningstar Sustainability Ratings do not show a clear relationship with defence and aerospace exposure either. These findings do not show that the funds are breaking SFDR rules, since Article 8 does not require conventional defence companies to be excluded. Instead, they point to an issue with how sustainability is communicated to investors. Neither the Article 8 classification nor a sustainability-related fund name tells investors whether a fund holds defence companies. The proposed revision of the SFDR would make the product categories more demanding, but it would still not require conventional defence companies to be excluded. Clearer disclosure of exposure to sectors such as defence could therefore help investors better understand what these labels mean in practice.