US$1 trillion impact of EU ESG renaming guidelines

At the same time as the Australian Government has kicked off a consultation around sustainable investment product labels, new Morningstar analysis is pointing to the significant disruption wrought by new fund renaming guidelines in the European Union.

The Morningstar analysis has revealed that about US$ 1 trillion in European fund assets were renamed in the past 18 months, noting that, in total, it is estimated that at least 1,346 funds or 24% of the Morningstar universe were renamed.

It said these included about 785 funds that have dropped ESG-related terms, 458 that changed ESG-related terms, and 103 that have added ESG-related terms.

The European fund naming guidelines are aimed at introducing minimum standards for funds that use ESG or sustainability related terms in their names, with asset managers having been given until 21 May to align with the new requirements.

Morningstar’s analysis said that ‘ESG’ and ‘Sustainable’ were the key terms removed most.

The Morningstar report on Global Sustainable Fund Flows over the second quarter showed that Europe had driven a recovery in fund flows despite continuing geopolitical and regulatory uncertainty.

It said European investors poured US$8.6 billion of net new money into sustainable funds over the quarter, after redeeming US$7.3 billion in the previous quarter.

This compares to US investors bleeding money out of sustainable funds for an 11^th consecutive quarter, with withdrawals of US$5.7 billion.

Looking at Australia and New Zealand it said sustainable funds recorded outflows of approximately US$165 million, reversing inflows of US$315 million in the previous quarter.

It said the second quarter outflows were driven by passive strategies which saw net redemptions of US$400 million while active strategies attracted net inflows of US$235 million.

Morningstar said that, by comparison, the broader open-end fund and ETF universe in Australia and New Zealand saw net inflows of over US$7.5 billion, an increase from the restated US$6.9 billion in net inflows recorded in the first quarter.

“While headline numbers suggest ESG demand is cooling in Australia, the reality is more nuanced. Excluding a one-off institutional switch, sustainable funds actually saw net inflows—mirroring the global rebound in ESG appetite,” Morningstar manager research senior analyst, Shamir Popat said.

“Active strategies are leading the charge locally and abroad, and with new climate disclosure rules now in effect, Australia is stepping into alignment with the global regulatory push. The challenge now is execution,”  Shamir said.

“The timing of outflows coincides with the start of mandatory climate reporting so institutions may be reallocating or pausing to align portfolios with clearer definitions of climate/sustainability outcomes,” Morningstar Sustainalytics senior executive Michelle Cameron added.