The European Securities and Markets Authority (ESMA) has updated its guidelines on ESG fund naming rules, setting a November deadline.
The rules are set to come into effect on 21 November, three months after being published, with over 1,600 funds thought to be impacted, according to Morningstar Sustainalytics data.
ESMA has implemented the guidelines to protect investors from greenwashing and unsupported sustainability claims.
Firms will be required to report whether their funds comply within two months – or 21 October – and managers of existing funds will then have six months from when the rules are published to comply.
Under the rules, published in May, funds with the term ESG or sustainable in their name must have at least 80% of investments tied to environmental or social characteristics.
In addition, funds with ESG or sustainable in their name must also not include fossil fuel companies, adhering to Paris-Aligned Benchmark (PAB) exclusion metrics.
Out of the 1,600 funds, just 21% set to be impacted are ETFs and index funds, Morningstar Sustainalytics said.
Despite this, they account for roughly 45% of the $40bn worth of stocks likely to be impacted, meaning passive funds would be required to divest from $19bn worth of assets in a bid to meet ESMA’s guidelines, or remove ESG or sustainable from their fund name.
This is due to the large number of holdings in their portfolios versus active funds.
