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SAINT HELENA: ESMA Guidelines Impact Funds with ESG Terms in Names

The European Securities and Markets Authority (ESMA) has published final guidelines on fund names that use terms related to sustainability or environmental, social, and corporate governance criteria. The new rules aim to protect investors against greenwashing risk by setting minimum standards for funds available in the EU.

Compliance Requirements

Funds need to meet new portfolio requirements or change their names to comply with the guidelines. ESMA’s guidance aligns with EU regulations that set exclusion criteria for climate-transition benchmarks and Paris-aligned benchmarks.

Scope of the Guidelines

The guidelines apply to fund managers who promote Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs). Around 4,300 EU funds with ESG- or sustainability-related names may fall under the scope of the new guidelines.

Impact on Fund Managers

Of these funds, more than 1,600 are exposed to stocks potentially in breach of the Paris-aligned benchmark (PAB) and climate-transition benchmark (CTB) exclusion rules. This means about two-thirds of funds may need to divest from these stocks or rebrand.

Sectors Most Affected

The sectors most affected by potential divestments include:

  • Energy
  • Industrials
  • Basic materials

The most affected stocks are:

  • TotalEnergies
  • Tencent Holdings
  • Shell

Compliance Deadline

Funds have until March 15, 2025, to comply with the new guidelines. To prepare, asset managers can:

  • Increase allocation to sustainable investments
  • Tweak sustainable-investment measurement methodologies
  • Reposition as transition funds
  • Rebrand to remove ESG-related terms

Aim of the Guidelines

The ESMA guidelines aim to ensure that fund names are truthful and accurate, promoting transparency and trust among investors. With the deadline approaching, it is crucial for fund managers to assess their portfolios and make necessary adjustments to comply with the new regulations.

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