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ESMA Fund Rules to Have Big Impact

New rules for EU funds are expected to have significant implications for fund managers, according to analysis by data and research provider Morningstar Sustainalytics. Following the European Securities and Markets Authority (ESMA) final guidelines of funds names using ESG or sustainability-related terms, funds will now be required to comply with the new portfolio requirements or change their names. Morningstar Sustainalytics identified 4,300 EU-domiciled funds with ESG or sustainability-related terms in their names. At best, only 56% of funds with the specific term “sustainable” in their titles would be able to keep the term if the minimum threshold for a meaningful allocation of sustainable investments is set at 30%, the paper said. The remaining 44% of funds would need to increase their sustainable investment allocations, adjust their methodologies or rebrand. If all assessed funds kept their existing names, it could lead to stock divestments worth up to US$40 billion, Morningstar Sustainalytics warned. “While it is impossible to predict the full impact of these guidelines, we expect their implications to be significant,” said Hortense Bioy, Head of Sustainable Investing Research at Morningstar Sustainalytics. “It may be tempting to assume that the big reshuffle ahead means many ESG funds may have been greenwashing. But the reality is that up until now, there were no standards, and it’s a complex area. The guidelines have the benefit of setting minimum standards for ESG products and will hopefully bring greater clarity to investors on what they are investing in.”

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