𝗧𝗵𝗶𝘀 𝗮𝗿𝘁𝗶𝗰𝗹𝗲 𝘄𝗮𝘀 𝘄𝗿𝗶𝘁𝘁𝗲𝗻 𝗯𝘆 𝗜𝗻𝘁𝗲𝗴𝗿𝘂𝗺 𝗘𝗦𝗚 𝗙𝗼𝘂𝗻𝗱𝗲𝗿 𝗮𝗻𝗱 𝗖𝗘𝗢 𝗦𝗵𝗮𝗶 𝗛𝗶𝗹𝗹.

Any fund marketed in the EU will have to comply with a new set of rules from 21 May this year.

The ESMA guidelines on funds’ names using ESG or sustainability-related terms even includes funds which are closed to new investors.

The new rules vary, depending on which of these 3 categories your fund is in:

1️⃣ Funds with these words or synonyms in the name: transition, net-zero, social, governance

2️⃣ Funds with these words or synonyms in the name: environmental, green, climate, impact, ESG

3️⃣ Funds with this word or synonyms in the name: sustainable

Funds in all categories must reach an 80% threshold; where 80% of the fund holdings must be made to meet the fund's E, S or G objectives.

Funds in category 1 must apply the CTB exclusions, whereas funds in categories 2 or 3 must apply the PAB exclusions.

What are the CTB and PAB exclusions?

The Carbon Transitional Benchmark (CTB) and Paris Aligned Benchmark (PAB) exclusions are lists of excluded corporate activities.

The CTB exclusions can be summarised as controversial weapons, tobacco, and violations of UNGC and OECD principles. 

The PAB exclusions are more extensive.

Managers are also expected to disclose in their benchmark methodology any additional exclusion criteria they use which are based on climate-related or other environmental, social and governance (ESG) factors.

See the full breakdown below:

Furthermore, funds in category 1 using 'transition' in their name, or in category 2 using 'impact' in their name, must also ensure that investments within the 80% threshold are on a 'clear and measurable path to an E or S transition...or are made to generate a positive impact'.

Funds in category 3 must also have >50% of their holdings in 'sustainable investments', as defined in SFDR Article 2(17).

So what will fund managers do?

The biggest hurdle seems to be the PAB exclusions, as well as being able to publish data (within the SFDR disclosures) which will prove compliance with these new exclusions and thresholds. 

Morningstar, MSCI and Clarity AI all seem to agree that currently, ~45% of funds marketed with Sustainable/ESG style names fall short of these new requirements. 

These managers have two options: 

🅰️ Deploy a Tech Platform that will show in granular detail which holdings do or do not meet these requirements and probably sell some Paris non-aligned holdings.

🅱️ Change the name of the fund, dropping all words like 'sustainable', 'environmental' or 'green'.

Most ESG commentators currently say there will be far more of B than A. 

We're not so sure.

Name changes will be taken as an admission that your Green Fund actually contains too many brown energy companies, or too many companies that 'do significant harm' to Europe's sustainability objectives.

Which risks greater reputational damage for the larger asset managers in particular.

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𝗪𝗵𝗮𝘁 𝗱𝗼 𝘆𝗼𝘂 𝘁𝗵𝗶𝗻𝗸?

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