(Bloomberg) — Analysts at Barclays Plc are warning that a growing number of stocks will be consigned to exclusion lists as new European Union rules for ESG funds are enforced.
The EU’s fund naming rules, announced earlier this month, place limits on how freely asset managers can claim a fund lives up to environmental, social and governance goals. Newly created funds will need to comply immediately, while existing ESG funds will be subject to a nine-month window to either prove compliance or abandon the label.
The new framework for ESG funds entails “strict” mandatory exclusions, Barclays analysts Scott Gordon and Jordan Isvy said in a note on Friday.
“In total, we estimate 10.3% and 13% of global and European equity indices, respectively, will be excluded,” they wrote. For investment-grade credit, “we calculate 13.2% and 12.6% could be excluded for Bloomberg’s global and euro-denominated Investment Grade benchmarks, respectively.” The analysis is based on MSCI data, they said.
The European Securities and Markets Authority began work on its fund naming requirements in 2022, after a boom in ESG investing led to concerns that some product claims were misleading. A year earlier, the European Union had enforced its Sustainable Finance Disclosure Regulation, an investing rulebook under which some $13 trillion of assets are now registered. According to Bloomberg Intelligence, roughly 60% of those are currently listed as either promoting ESG or making it an outright objective.
The Barclays analysts note that the energy sector is most exposed to the risk of exclusions as a result of the new fund-naming rules. After that comes the consumer staples sector, in part because it includes tobacco companies. Consumer staples also encompass a significant number of companies that appear to clash with the EU Taxonomy’s guidelines on not doing any significant harm to the environment, the analysts said.
Regulatory authorities in EU member states must incorporate the guidelines in their supervision of the market, or state why they don’t intend to comply.
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