Which and what type of funds might get affected by these changes
Who gets affected by PAB minimum safeguards?
According to Bloomberg, there are a total of 1,826 funds under the UCITS European Directive that have English ESG-, or impact- related terms in their name (please refer to the annex for the full list of words used in this analysis below).
From a total of 1,826 funds, 3% are Article 6 funds (according to the Sustainable Finance Disclosure Regulation – or SFDR – definition), 80% are Article 8 funds, and the remaining 17% are Article 9 funds.
Article 6 funds do not have, by default, any sustainable investment objective nor embrace investment in assets with environment or social benefits. As such, in order to comply with the new ESMA guidelines, at least 53 Article 6 funds will have to change their name in order to meet the new guidelines.
Exclusions
To assess whether Article 8 and 9 funds comply with the new ESMA guidelines, we must evaluate if funds with ESG- or impact-related terms in their names meet minimum safeguards. This involves checking if they invest in companies that breach the PAB exclusions (b, d, e, f, and g). The analysis focuses solely on equity investments, using Bloomberg to identify excluded companies, while fixed-income investments are not considered. The analysis is done individually for each exclusion to avoid double counting, starting with funds required to comply with the PAB.
Exclusion 1: companies involved in the cultivation and production of tobacco
Around 300 Article 8 funds still invest in companies involved in tobacco cultivation and production, including Philip Morris International, Altria Group, British American Tobacco PLC, and Imperial Tobacco, which breach exclusion (b) of the ESMA guidelines. However, only 2% of Article 8 funds with ESG-related terms in their names are invested in these companies, while no Article 9 funds have exposure to them. As a result, approximately 30 funds will need to either adjust their investments or change their names to comply with the new ESMA guidelines.
Exclusion 2: companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite
Our analysis reveals that 39 Article 8 funds invest in companies that derive at least 1% of their revenues from coal exploration. However, none of these funds have ESG-related terms in their names. Additionally, no Article 9 funds invest in these companies. Therefore, there appear to be no funds in breach of the new ESMA guidelines regarding exclusion (d) of the PAB.
Exclusion 3: companies that derive 10% or more of their revenues from the exploration, extraction, distribution or refining of oil fuels
Currently, 1,650 Article 8 funds and 16 Article 9 funds invest in companies that derive more than 50% of their revenues from oil exploration. However, when focusing on those with ESG- or impact-related terms in their names, 15% of Article 8 funds and 1% of Article 9 funds are in breach of the new ESMA guidelines. This means at least 225 funds with ESG-related terms will need to either change their names or adjust their investments to comply with the guidelines.
Exclusion 4: companies that derive 50% or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels
Our analysis focuses on gas distribution and transportation companies excluded by the PAB, specifically three publicly traded entities: Enagas Financiaciones SA (Spain), Italgas SA, and Snam SpA (Italy). Currently, 805 Article 8 funds and 19 Article 9 funds invest in these companies.
However, among those with ESG-related names, only 8% of Article 8 funds and 3% of Article 9 funds are involved with these companies. As a result, we anticipate that at least 128 funds will need to adjust their investments or names to comply with the new ESMA guidelines.
Exclusion 5: companies that derive 50% or more of their revenues from electricity generation with a GHG intensity of more than 100g CO2 e/kWh
For simplicity, we examined publicly-traded utility companies that generate a significant portion of their electricity from non-renewable sources. Out of 11 such companies, only three—ENEL, Engie, and CEZ—breach the PAB exclusions. Currently, almost 1,500 Article 8 funds and 67 Article 9 funds invest in these companies.
However, among funds with ESG-related names, only 16% of Article 8 and 7% of Article 9 funds are involved. Thus, we estimate that around 251 funds will need to adjust their portfolios or names to comply with the new ESMA guidelines. This number likely underrepresents the true figure due to screening limitations.
Who gets affected by minimum safeguards CTB?
In our analysis of funds with transition-, social-, and/or governance-related terms in their names, we identified a total of 52 Article 8 and 9 funds under the UCITS directive—25 Article 8 funds and 27 Article 9 funds.
CTB exclusions are less restrictive compared to PAB exclusions, permitting investments in sectors like utilities or companies involved in gaseous or oil fuels. For this analysis, we focused on exclusion (b), which pertains to companies involved in tobacco cultivation and production.
Among the 300 Article 8 and 2 Article 9 funds investing in tobacco companies, only one fund with a transition-related term in its name is involved with both Philip Morris International and Altria Group.
Overall, from the funds with transition-related terms in their names, 1 (or less than 2%) will have to either change its name or change its portfolio in order to comply with the new ESMA guidelines.
Annex: list of words
English ESG-, and impact-related words
- Climate / Clim
- Environment
- Environmental
- Environmentally
- ESG
- Green
- Impact
- Impacting
- Impactful
- Sustainability
- Sustainable / Sust
- SRI
- Responsible
- PAB
- Paris-aligned
- Carbon
- Biodiversity
- Clean
- Net-zero
- SDG
English transition-, social-, and governance- related words
- Transition
- Progress/ion
- Transform/ation
- Change
- Adapt/ation
- Improving
- Social
- Governance
- Evolution
Final report
View the Final Report Guidelines on funds’ names using ESG or sustainability-related terms
ESMA Reveals Report
Full report: Part 1 Part 2 Part 3 Part 4
Source: ABN-AMRO, July 17, 2024
