Fund
names
are
a
powerful
marketing
tool,
and
to
protect
investors
against
“greenwashing”,
the
European
Securities
and
Markets
Authority
(ESMA)
has
just
published
new
rules
for
funds
that
use
ESG
or
other
sustainability-related
terms
in
their
names.
This
is
likely
to
lead
to
fund
having
to
sell
a
number
of
stocks,
including
those
from
defence
and
oil
sectors.
•
Funds
must
have
a
minimum
of
80%
of
investments
that
meet
the
environmental
or
social
characteristics
of
the
sustainable
investment
strategy
or
objectives.
•
Funds
must
comply
with
the
exclusions
set
by
the
European
regulation
for
Paris
Aligned
Benchmarks
(PABs)
and
Climate
Transition
Benchmarks
(CTBs).
These
new
guidelines
could
apply
to
new
funds
from
September
15
2024
and
to
existing
funds
from
March
15
2025.
How
Many
Funds
Could
be
Affected?
Morningstar
Sustainalytics
has
produced
a
report
(EU
Guidelines
on
ESG
Funds’
Names:
A
Great
Reshuffle
Ahead)
to
analyse
the
impact
of
these
European
guidelines.
While
the
guidelines
do
not
provide
an
exhaustive
list
of
terms
that
appear
in
fund
names,
the
authors
of
the
report,
Hortense
Bioy
(head
of
sustainable
investing
research
at
Morningstar
Sustainalytics),
Arthur
Carabia
(director
of
ESG
policy
research
at
Morningstar)
and
Biddappa
A.R.
(senior
quantitative
research
technology
analyst)
analysed
Morningstar
to
identify
additional
terms
that
might
be
in
scope
and
the
funds
that
use
them.
They
found
nearly
4,300
mutual
funds
and
ETFs
available
for
sale
in
the
European
Union
that
use
some
ESG
or
sustainability-related
terms
in
their
names
and
may
fall
within
the
scope
of
the
new
guidelines.
In
total
they
represent
approximately
15%
of
the
total
universe
of
open-ended
funds
and
ETFs
marketed
in
the
EU.
The
authors
of
the
report
first
identified
companies
that
may
be
in
breach
of
the
CTB
and
PAB
exclusion
rules.
Of
the
4,300
funds
identified,
the
analysis
was
carried
out
on
some
2,500
funds
with
portfolio
data.
Of
these,
just
over
1,600
had
at
least
one
company
in
breach
of
the
PAB
or
CTB
exclusion
rules,
as
interpreted
by
Morningstar
Sustainalytics.
Of
those
1,600
funds,
about
500
hold
more
than
five
stocks
that
could
violate
the
exclusion
rules
and
would
require
further
portfolio
adjustment.
The
Most
Common
Stocks
in
These
Funds
The
following
table
lists
the
10
most
common
companies
in
the
funds
included
in
the
study
that
meet
our
PAB
or
CTB
exclusion
criteria,
along
with
the
number
of
funds
included
in
the
study
that
hold
these
companies,
the
aggregate
value
of
each
company’s
holding,
as
well
as
the
main
reason
for
their
exclusion.
Dassault
Systemes
(DSY),
TotalEnergies
(TTE)
and
Neste
(NESTE)
are
the
three
most
common
stocks
in
the
funds
included
in
the
study
that
meet
the
PAB
or
CTB
exclusion
criteria
according
to
Morningstar
Sustainalytics
research.
Dassault
Systemes
provides
software
applications
and
services
to
multiple
industries,
including
mining
through
its
Port
Kembla
coal
terminal,
a
coal
export
facility.
Through
GEOVIA
Minex,
the
company
offers
integrated
geology
and
mine
planning
solutions
for
coal
deposits,
used
for
resource
assessment
and
effective
exploration.
According
to
Sustainalytics,
Dassault
Systemes’
estimated
revenues
from
thermal
coal
support
products
and
services
represent
1%
of
the
company’s
total
revenues.
Neste
is
a
refining
and
marketing
company
offering
oil
refining
and
renewable
solutions.
Sustainalytics
estimates
that
oil
refining,
transportation
and
storage
revenues
account
for
50%
of
the
company’s
total
revenues.
Stocks
with
the
Highest
Exposure
in
the
Funds
If
we
now
analyse
the
impact
on
the
positions
of
potentially
affected
funds,
not
in
terms
of
presence
in
portfolios
but
in
terms
of
monetary
value,
it
can
be
seen
that
TotalEnergies,
Tencent
and
Shell
are
the
three
companies
that
will
be
most
affected
by
the
BAP
exclusion
rule,
in
dollar
terms.
TotalEnergies
is
a
French
oil
company
held
by
356
funds
included
in
the
study
for
an
aggregate
value
of
about
$3.5
billion,
representing
about
2%
of
TotalEnergies’
total
market
capitalisation.
TotalEnergies
is
in
more
ESG
portfolios
than
its
rivals
Shell
(144
funds),
Exxon
Mobil
(90
funds)
and
BP
(94
funds).
As
for
Chinese
communications
services
company
Tencent
Holdings
(00700),
which
is
listed
in
some
167
investment
funds
with
an
aggregate
value
of
$3.3
billion,
it
is
on
Sustainalytics’
list
of
violators
of
the
UN
Global
Compact’s
human
rights
principles.
Tencent
is
arguably
China’s
most
influential
internet
company.
It
is
the
world’s
largest
seller
of
video
games
and
also
runs
China’s
largest
social
networking
super
app,
WeChat,
which
is
part
of
the
fabric
of
life
for
Chinese
people,
who
use
it
to
shop,
watch
videos,
play
games,
order
food
and
taxis,
and
so
on.
However,
Tencent
reportedly
exercises
widespread
censorship
and
surveillance
of
the
platform’s
users
without
adequate
management
and
disclosure
systems
in
place
to
ensure
the
right
to
freedom
of
expression
and
privacy.
Most
Affected
Stocks
in
Climate
Transition
Funds
In
the
table
below,
we
list
the
20
most
common
companies
in
funds
that
use
transition-related
terms
in
their
names.
These
companies
fall
within
the
scope
of
the
CTB’s
less
stringent
exclusion
rules.
TotalEnergies
is
a
French
oil
company
held
by
356
funds
included
in
the
study
for
an
aggregate
value
of
about
$3.5
billion,
representing
about
2%
of
TotalEnergies’
total
market
capitalisation.
TotalEnergies
is
in
more
ESG
portfolios
than
its
rivals
Shell
(144
funds),
Exxon
Mobil
(90
funds)
and
BP
(94
funds).
As
for
Chinese
communications
services
company
Tencent
Holdings
(00700),
which
is
listed
in
some
167
investment
funds
with
an
aggregate
value
of
$3.3
billion,
it
is
on
Sustainalytics’
list
of
violators
of
the
UN
Global
Compact’s
human
rights
principles.
Tencent
is
arguably
China’s
most
influential
internet
company.
It
is
the
world’s
largest
seller
of
video
games.
It
also
runs
China’s
largest
social
networking
super
app,
WeChat,
which
is
part
of
the
fabric
of
life
for
Chinese
people,
who
use
it
to
shop,
watch
videos,
play
games,
order
food
and
taxis,
and
so
on.
However,
Tencent
reportedly
exercises
widespread
censorship
and
surveillance
of
the
platform’s
users
without
adequate
management
and
disclosure
systems
in
place
to
ensure
the
right
to
freedom
of
expression
and
privacy.
Most
Affected
Stocks
in
“Social”
Funds
In
the
table
below,
we
list
the
nine
most
common
companies
in
funds
that
use
“social”
terms
in
their
names.
These
companies
fall
within
the
scope
of
the
CTB’s
less
stringent
exclusion
rules.
Eight
of
the
10
stocks
are
defence
companies.
In
total,
Airbus
SE
(AIR)
is
in
the
portfolios
of
94
funds,
Safran
SA
(SAF)
is
in
84
funds,
while
Thales
(HO)
is
present
in
62
funds.
The
reason
for
these
holdings
in
many
ESG
funds
is
that,
while
the
vast
majority
of
ESG
funds
tend
to
exclude
companies
involved
in
controversial
weapons,
exceptions
are
made
for
companies
involved
in
nuclear
weapons
that
are
domiciled
in
countries
that
have
signed
the
Nuclear
Non-Proliferation
Treaty.
We
expect
these
securities
to
remain
in
ESG
portfolios.
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