ESMA, SFDR to “Transform” ESG Fund Landscape
Transition investment trend expected to flourish further, despite geopolitical uncertainty.
New rules from the European Securities and Markets Authority (ESMA) and incoming changes to the EU Sustainable Finance Disclosure Regulation (SFDR) are likely to spark a radical shift in the ESG fund landscape.
ESMA’s guidelines on fund names came into effect in November and are expected to serve as an interim anti-greenwashing measure ahead of a more expansive and far-reaching update to the SFDR that will be put forward later this year.
“[These new guidelines] will completely transform the ESG fund landscape,” Hortense Bioy, Head of Sustainable Investing at Morningstar, told ESG Investor. “A fund’s name is the biggest signal of intentionality. Only a small number of funds will not be affected by the rules in one way or another [and] more than half could have to change their name.”
ESMA’s fund name guidelines will ensure funds invest at least 80% of their assets in line with sustainability-related terms in their name – such as ‘ESG’ or ‘transition’ – similar to the UK Sustainability Disclosure Requirements’ (SDR) fund naming and marketing rules. The rules have applied to new funds since 21 November, and will be introduced for existing funds in May 2025.
Bioy noted the full impact of the ESMA’s guidelines would not be seen until data is released, likely in Q2 or Q3, but that asset managers have been actively reviewing their ESG fund ranges and conducting impact analysis.
“In terms of product development, ESMA and SFDR will cause a complete transformation,” she said. “Managers have to decide which funds they want to remain unchanged, which ones to merge or liquidate, and which ones require a strategy or name change. It’s a critical year in that respect.”
Earlier this month, Autorité des Marchés Financiers, the French securities commission, updated its policy on fund names in line with ESMA’s guidelines, with other countries expected to follow suit. Meanwhile, ESMA is expected to publish further SFDR guidance and a Q&A document later this year.
Bioy said this could help avoid market fragmentation arising from ESMA’s rule, as happened with SFDR when it was first introduced. “Hopefully common guidance will be provided that reduces confusion and also make things easier for asset managers who distribute their products across borders.”
She added that ESMA’s rules could increase alignment on fund name guidelines globally as rules in the APAC region and other countries start to emerge.
Transition and uncertainty
Last month, the EU Platform on Sustainable Finance outlined a proposed three-tier categorisation scheme in response to the European Commission’s SFDR review. The proposed scheme would include three categories: sustainable; transition; and ESG collection. All other products would be labelled “unclassified”.
If implemented, this would see the term transition have a place in ESMA’s fund name guidelines, SFDR and the UK’s SDR, underlining the prevalence of the theme.
Bioy highlighted that transition-focused funds are an area of growing investor appetite. Earlier this week, Climate Investment Funds debuted a US$500 million clean energy transition bond, while British multinational bank Standard Chartered and global alternative asset manager Apollo jointly committed US$3 billion to the climate transition.
Last February, Brookfield Asset Management’s second global transition fund raised US$10 billion at first close, and last September research from MSCI found more than US$50 billion had been invested in over 100 transition-labelled funds globally.
“I’ve had many conversations about transition strategies with asset managers. It’s becoming a segment of the market on its own with several approaches. Asset managers have been engaging with regulators to make sure their interpretation of the ESMA rules about transition funds is correct,” said Bioy. “In the past, there’d been confusion about the place of transition in ESG, which has caused a lot of investor criticism and accusations of greenwashing.”
She added: “Hopefully these rules on names will clarify that the world doesn’t have many sustainable companies and that there is a need to support those companies that are on a path to become sustainable.”
In November, Morningstar found ESG funds had drawn in US$10.4 billion in net new money in Q3 2024, but Bioy said predicting fund flow trends for this year is “hard”.
“Everyone is in a wait-and-see mode right now, waiting to hear from [incoming US President Donald] Trump, his policies, and seeing how these will impact the world,” said Bioy. “ESG funds are not immune to macroeconomics, and geopolitics will have an important impact on investment decisions this year.”
She added that this year’s outlook for sustainable investing is very “uncertain” at this juncture, which will likely be a cause of concern for investors who “don’t like uncertainty”.
The post ESMA, SFDR to “Transform” ESG Fund Landscape appeared first on ESG Investor.