Last month, the European Securities and Markets Authority stated that environmental, social and governance (“ESG”) investment funds would need to have no less than 80% of assets under management engaged in activities associated with ESG objectives. The new rules also prevent the funds from investing in assets such as large producers of oil and gas.
A recent analysis determined that these new rules could greatly impact the United States, particularly on stock market value. The analysis conducted by Morningstar estimates that more than 40% of possible stock divestments that shall be caused by the new rule will affect the United States. France and China may also see stock divestment increase but not to the level of the U.S.
Fund managers who would prefer to not diversify their portfolios do have the option of renaming their products. Morningstar Sustainalytics’ director of ESG policy research, Arthur Carabia, stated in a recent LinkedIn post that he expected some funds to remove ESG and associated terms from their names. Carabia added that other funds would choose to include terms that didn’t have as many requirements under the new rules.
The analysis identified more than 4,000 funds in the European Union with sustainability-related or ESG terms in their names that could be impacted by the new rules. It then estimated that more than 1,600 funds that wanted to keep their names as-is would need to divest stocks totaling almost $40 billion.
The analytics company noted that this was because funds weren’t allowed to invest in companies that weren’t eligible per the new rules. In addition, the analytics company identified sectors that would be hit hard by divestment. The sectors included basic materials, energy and industrials such as defense and railroads.
Companies at risk of divestment from ESG funds domiciled in the European Union were also identified. Theses companies included Chevron Corp, Wells Fargo & Co, Schlumberger NV and Exxon Mobil Corp.
Regulatory authorities are expected to integrate the guidelines in market supervision or give reasons why they will not be complying with the new regulations. Morningstar’s head of sustainable investing research, Hortense Bioy, revealed that she didn’t expect a comprehensive list of sustainability terms or ESG to be provided but posited that there would be room for interpretation.
The latest rules highlight the European Union’s efforts to address holes in its Sustainable Finance Disclosure Regulation. For the time being, asset managers will need to incorporate the new guidelines to avoid any unwanted attention from the regulators.
For enterprises such as Reflex Advanced Materials Corp. (CSE: RFLX) (OTCQB: RFLXF) that have embraced ESG, a time may come when they are ahead of competitors that were laggards when forward-looking entities took up ESG of their own volition.
NOTE TO INVESTORS: The latest news and updates relating to Reflex Advanced Materials Corp. (CSE: RFLX) (OTCQB: RFLXF) are available in the company’s newsroom at https://ibn.fm/RFLXF
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