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European ETFs may find it much more difficult to comply with new ESG fund labeling rules recently implemented by the French government.
Newly stricter “socially responsible” ISR classification will force ETFs holding this label to sell their fossil fuel holdings from 2025, likely triggering a wave of divestment across the fund industry .
But large ETFs that are required to track rules-based indexes will have a much harder time complying with the new ruling, and many could lose their labels.
“Passive funds are much trickier because you have to switch indexes,” said Hortense Bioy, global director of sustainability research at Morningstar.
“There is a distinction between large-cap ETFs and small-cap ETFs, and it is easy to switch to either ETF. If asset managers don’t want to switch indexes, they will need to launch an entirely new ETF.”
The $9.5 billion iShares MSCI USA SRI UCITS ETF (SUAS) and the $9.7 billion iShares MSCI World SRI UCITS ETF (SUSW) are currently the top two ISR labeled funds, with approximately $324 million in euro equivalents. Euro oil and gas exposure is highest. Each has assets under management (AUM) of €208 million, according to Morningstar.
“Since these ETFs are large and distributed across Europe, it is unlikely that they would want to change the index,” Bioy added.
Major ETF issuers such as BlackRock, Invesco, and Amundi have all changed some ETFs in the past from non-ESG indexes to Switching to index.
However, new rules from the French government will once again test that ambition, and broader concerns over divergent ESG regulations in Europe will also raise concerns.
“I don’t think one country should decide what the index of a product should be,” Bioy said.
“We are at the point where we have labels based on the Sustainable Disclosure Regime (SDR), categories based on the SFDR may be introduced, and there are already eight to 10 national labels across Europe. Exists.
“This will change the conversation for product manufacturers across Europe. The problem is that there will be too many labels, which will end up being costly and confusing for investors.”
The new rules, introduced by France’s Finance Minister Bruno Le Maire, are considered “essential” to combat global warming and make it easier for sustainable investors to understand what they are investing in. I am.
In addition to completely eliminating fossil fuels, high-carbon emitting companies will also be required to adopt transition plans in line with the Paris Agreement.
New funds introduced to the market after March 1, 2024 will need to adopt the latest framework, while existing ETFs will need to comply until 2025.
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