EU shoots itself in the ESG funds

The European Union’s out of extremities to shoot itself in so it’s started targeting one of its darlings: so-called sustainable investment funds. In fresh news this week, Reuters reported that Brussels is changing its naming rules for these funds to make sure there’s no hanky-panky with Big Oil.

It’s so utterly ridiculous it’s the regulatory equivalent of the Fiat Multipla. So, the EU wants to make sure that funds calling themselves “green”, “sustainable” or featuring the words “impact” or “environmental” in their name do not have investments in oil and gas companies as well as “the most polluting electricity companies,” as Reuters refers to them.

Under these rules, 55% of the target funds are already in violation and would need to sell their holdings in those forbidden industries. Which is apparently a problem — because it could reduce investment in transition projects. This is actually better than the Multipla. It’s a Nissan Cube.

According to the Reuters report, fund managers and industry associations are worried that the new rules would shut access to transition funding for companies in need of such funding, such as, I don’t know, maybe gas-fired generators dreaming of a shiny new carbon capture installation, or a Big Oil major regretting its decision to sell its offshore wind business.

Joke aside, the bigger problem appears to be government overreach, as spelled out by BNP Paribas’ chief of sustainable capital markets. “Our main concern is not so much the impact on a given company or fund, it is the signalling to green bond issuers and investors that regulators could disrupt the market with new rules,” Agnes Gourc said and she is not wrong.

By constantly intervening in what are supposed to be free markets — but haven’t been for a long time — Brussels is making the same mistake as the U.S. government with its sanctions. Moderate and carefully considered use might be productive but abusing the weapon will backfire sooner or later, likely sooner.

Luckily, there’s a simple solution to this pressing fund problem. Funds could just change their name and lose the green reference. Either that or sell their supermajor holdings. It would be interesting to see what funds would prefer.