Barclays sees US$30 billion selloff risk amid new EU ESG fund rule

ASSET managers offering environmental, social and governance (ESG) funds in Europe may need to offload close to US$30 billion in stocks and bonds if they intend to hold onto the label under new rules, research by analysts at Barclays suggests.

“We do expect most managers to choose to retain their name, and therefore sell excluded holdings,” Barclays analysts, led by Charlotte Edwards, said on Thursday (Jul 11).

That is “particularly on the active side, as these funds are typically marketed with a sustainable name in order to attract a certain group of investors”.

The assessment follows the enforcement in the European Union of new fund naming rules designed to crack down on ESG investing claims after repeated evidence of greenwashing.

Among stocks facing the biggest hit are TotalEnergies, Costco Wholesale, Exxon Mobil and Shell, Barclays said. 

Other studies have arrived at similar conclusions. Morningstar Sustainalytics said last month it expects aggregate divestments potentially reaching US$40 billion, due to the EU’s new ESG fund naming rule.

Close to 6,500 EU-domiciled funds currently have ESG and sustainability-related terms in their names, said a May report which outlined the requirements set by the European Securities and Markets Authority (ESMA).

Roughly three out of four equity and fixed income funds hold at least one security that breaches the new rules.

“If all funds were to sell exposure, rather than removing ESG-terms from their fund name, this would result in US$24.5 billion of selling pressure from equity funds and US$4.8 billion from fixed income funds,” Barclays said. 

Passive funds are more likely to change their names than active funds because selling a security would likely require a change to the underlying benchmark, making an exit “more challenging”, the analysts noted.

They looked at 1,700 equity funds and 800 fixed income funds with a combined US$1.34 trillion in assets under management.

Under the new ESMA rules, investment funds with ESG or equivalent terms will need to have at least 80 per cent of their assets under management in something that is actually related to the label.

Additionally, funds will not be permitted to invest in companies that are on an exclusion list under the EU’s Paris-aligned benchmark rules, or the relatively less stringent climate-transition benchmark rules.

Using per MSCI data, the analysts estimate that companies that breach ESMA’s exclusion lists constitute 2.5 per cent and 1.5 per cent of assets under management in equity and fixed income funds captured by the regulation, respectively.

Funds holding US and emerging market assets are more heavily exposed to the risk of a selloff than those with European holdings.

This is particularly so for the fixed income side, because of exposures to oil and gas, the analysts said.

They noted that sectors that are most likely to be hit by exclusions under the new ESMA fund rules are energy and utilities. BLOOMBERG