Esg label, new rules will force 1600 funds to change their name

At least 1,600 European equity funds will have to change their name by removing the ESG or the word 'sustainability' from their label. If, on the other hand, they all want to keep their names, they will have to divest shares worth around USD 40 billion. This was calculated by Morningstar, the US data provider to which the ESG Sustainalytics rating agency also belongs. 4,300 European funds, both active and passive, were analysed that have the ESG acronym or words linked to sustainability in their labels, as indicated by the new guidelines issued by Esma, the EU authority that oversees financial markets.

On 14 May, Esma published its document on the use of sustainability-related terms in the world of asset management with the aim of flushing out greenwashers. In addition to the introduction of the transition category, Esma has established a threshold: the Esg term may only be used by funds with at least 80 per cent of their investments meeting environmental or social characteristics or sustainable investment objectives. These funds will, in particular, have to exclude from their portfolios companies that do not comply with the rules of the benchmarks aligned to the Paris climate treaty: these are the so-called Pab (Paris aligned benchmark) indices that exclude companies with a share of turnover derived from fossil fuels. For funds placed instead in the transition category, companies that do not meet the less restrictive criteria of the Climate transition benchmarks (Ctb) will be de-listed. "Although it is impossible to predict the full impact of these guidelines, we expect their implications to be significant," said Hortense Bioy, head of sustainable investment research at Morningstar Sustainalytics. "They have the potential to completely reshape the landscape for ESG funds in Europe.

Among the 4,300 funds analysed, there were also bond products on which the data was lacking. Hence Morningstar's decision to keep them out of the analysis. The survey showed that the sectors most affected by potential divestments by managers are energy, industry and basic materials. The most affected countries would be the US, France and China in terms of market value. Among the most affected stocks are TotalEnergies, Tencent Holdings, Ecolab and Shell.

Morningstar Sustainalitycs has therefore assessed the potential impact of the Esma guidelines on fund portfolios and, on the basis of the Pab and Ctb exclusions, has drawn up a series of rankings within the 1600 selected products. At the top of the page we have the ranking of instruments, mostly passive, with the highest number of companies that may not be aligned with the Pab and Ctb criteria. In the top five, there are two funds from Vanguard, with 131 and 128 stocks, and three from State Street: two portfolios with 126 stocks and one with 109 non-aligned stocks.

Then there are other rankings in the report: there is the one with the funds with the highest market value in companies that could violate the Pab and Ctb indices; in this case, in the first three places there are two liabilities of Northern Trust, the World Custom Esg Equity Index Fund and Fgr - Emerging Markets Custom Esg Equity Index Fund: in their portfolios the companies under observation weigh in at 956 and 734 million dollars respectively; in third place is an active fund, the BlackRock Solutions Funds Icav - Coutts UK Esg Insights Equity Fund (715 million euros the weight of the companies considered). What will managers do at this point? For Morningstar, given "the strict nature of the PAB exclusions, we expect many funds to drop 'Esg' and related terms from their names; others will reposition themselves as transitional funds, to which the less stringent Ctb exclusions apply".