ESMA fund-naming rules may force rebranding for 44% of eco-labeled funds

Clarity AI research found that 44% of EU funds using environmental and impact terms may need to rebrand or divest assets to meet ESMA's Paris-aligned benchmark exclusions, with funds given six months to comply. The fund-naming crackdown signals tightening anti-greenwashing standards relevant to Indian asset managers marketing ESG funds globally.

Clarity AI research found that 44% of EU funds using environmental and impact terminology may need to rebrand or divest assets, because they hold assets breaching Paris-aligned benchmark (PaB) exclusionary criteria. Of funds failing PaB standards, 82% are classified as Article 8. ESMA finalised the guidelines on May 14, 2024, taking effect three months after posting, with existing funds given six months to comply. Funds using environmental or impact terms must keep at least 80% of assets fulfilling stated objectives and avoid PaB-excluded assets.

EU asset managers and funds using ESG, environmental, sustainable, or impact terms in their names are directly affected, particularly the 82% of non-compliant funds classified as Article 8. PaB exclusions bar investments in controversial weapons, tobacco production, hard coal and lignite above 1% revenue, oil fuels above 10%, gaseous fuels above 50%, and high-GHG-intensity electricity above 50%. Funds breaching these thresholds, such as through fossil fuel exposure, must rebrand or restructure portfolios.

Fund managers should audit portfolio exposure against PaB exclusions and the 80% objective-alignment threshold within the six-month compliance window, deciding whether to rebrand or divest. Managers should also prepare for the series' second part assessing UN Global Compact and OECD guideline violations, which Clarity AI expects could push non-compliance above 44%. Indian asset managers marketing ESG-labelled funds to EU investors should monitor how naming rules and PaB exclusions shape product naming and holdings.

Key figure — Funds potentially needing rebranding or divestment: 44% of those using environmental and impact terms