Asset managers offering environmental, social, and governance (ESG) funds in Europe may need to divest nearly $30 billion in stocks and bonds to maintain their ESG labels under new regulations, according to research by Barclays analysts.
” We do expect most managers to choose to retain their name, and therefore sell excluded holdings,” stated Barclays analysts, led by Charlotte Edwards. This is especially true for active funds, often marketed with a sustainable name to attract specific investors.
This assessment comes in response to the European Union’s new fund naming rules aimed at curbing misleading ESG investing claims following numerous instances of greenwashing.
Barclays highlighted that major stocks like TotalEnergies, Costco Wholesale, Exxon Mobil, and Shell are likely to be significantly affected. Similarly, a recent Morningstar Sustainalytics report predicted potential divestments of up to $40 billion due to the EU’s new ESG fund naming regulation.
A May report noted that around 6,500 EU-domiciled funds currently include ESG and sustainability-related terms in their names, with three-quarters of equity and fixed-income funds holding at least one security that violates the new rules.
“If all funds were to sell exposure, rather than removing ESG-terms from their fund name, this would result in US$24.5 billion of selling pressure from equity funds and US$4.8 billion from fixed income funds,” Barclays said. Passive funds are more likely to rebrand than active funds since selling securities would require altering the underlying benchmark, complicating the exit process.
The analysts reviewed 1,700 equity funds and 800 fixed-income funds managing a combined $1.34 trillion in assets. Under the new ESMA rules, funds with ESG-related terms must ensure at least 80% of their assets are aligned with the label and cannot invest in companies on the EU’s exclusion lists per the Paris-aligned or climate-transition benchmarks.
Based on MSCI data, the analysts estimate that companies breaching ESMA’s exclusion lists account for 2.5% of equity and 1.5% of fixed-income assets under management impacted by the regulation. Funds with U.S. and emerging market assets face a higher selloff risk than those with European holdings, especially in the fixed-income sector due to oil and gas exposures. The energy and utilities sectors are most likely to be affected by the exclusions under the new ESMA rules.