Barclays’ analysts have warned that many stocks may be added to exclusion lists after the new European Union (EU) rules for ESG funds are enforced.
The fund naming rules of the EU were announced earlier this month. These rules limit the freedom of asset managers to claim that funds live up to the ESG goals. The new funds have to comply immediately with the new rules while the existing ESG funds will have a nine-month window to prove their compliance or abandon the label.
Barclays analysts Scott Gordon and Jordan Isvy said in a note that the new framework for ESG funds entails ‘strict’ mandatory exclusions.
They wrote, “In total, we estimate 10.3 percent and 13 percent of global and European equity indices, respectively, will be excluded.” The note further said, “For investment-grade credit, we calculate 13.2 percent and 12.6 percent could be excluded for Bloomberg’s global and euro-denominated Investment Grade benchmarks, respectively.”
The note said that the funds in the energy sector are the most exposed to the risks of exclusion followed by the consumer staples sector as it includes tobacco companies.