European ESG Fund Naming Rules Set for November
The European Securities and Markets Authority has updated its guidelines on ESG fund naming rules that will become effective on the continent in November.
The rules are set to come into effect Nov. 21, three months after being published. More than 1,600 different types of funds including exchange-traded funds to be affected, according to Morningstar Sustainalytics data.
The regulator, referred to as ESMA, has said it's implementing the guidelines to protect investors from greenwashing and unsupported sustainability claims. ETF and issuers of other funds have been accused of overstating the environmental benefits of their environmental, social and governance products, leading to a crackdown in the U.S. and Europe over so-called greenwashing. In the U.S. last year, Goldman Sachs Group Inc. was fined $4 million for failing to comply with ESG-related policies and procedures and BNY Mellon was charged $1.5 million for ESG violations.
In the EU, firms will be required to report whether their funds comply within two months—or Oct. 21—and managers of existing funds will then have six months from when the rules are published to comply.
ESG Rules: 1,600 Funds Effected Including ETFs
Under the rules, published in May, funds with the term ESG or sustainable in their name must have at least 80% of investments tied to environmental or social characteristics.
In addition, funds with ESG or sustainable in their name must also not include fossil fuel companies, adhering to Paris-Aligned Benchmark (PAB) exclusion metrics.
Out of the 1,600 funds, just 21% set to be impacted are ETFs and index funds, Morningstar Sustainalytics said.
Despite this, they account for roughly 45% of the $40bn worth of stocks likely to be impacted, meaning passive funds would be required to divest from $19bn worth of assets in a bid to meet ESMA’s guidelines, or remove ESG or sustainable from their fund name.
This is due to the large number of holdings in their portfolios versus active funds.
The biggest U.S. ESG ETF is the $13 billion iShares ESG Aware MSCI USA ETF (ESGU). It's gained 29% over the past year, while at the same time shedding $2.7 billion in assets.
This article was originally published at etf.com sister publication ETF Stream.