Asset managers renaming ESG funds told to brace for backlash

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Asset managers that just reclassified hundreds of ESG funds should expect to have to explain themselves to their regulators and investors, according to lawyers advising the industry.

The warning follows the recent redesignation of about 700 funds in the EU to a category known as Article 8, which is seen as offering some environmental, social and governance attributes. The fund class has mushroomed since its introduction in March last year to now make up roughly half the total domiciled in the EU, or $3.8 trillion, analysts at Morningstar Inc. estimate.

Asset managers want Article 8 funds on their shelves in large part “because they feel that there’s pressure from distribution channels, which there absolutely still is,” said Ciara O’Leary, a partner at law firm Dechert LLP who advises the fund industry. But changing the classification of a fund that’s been on the market for a year opens the door to “queries from the regulators” wanting to know the reasons and whether investor approval is needed.