Share this article Shareholders enter the gates of the headquarters' of French oil and gas company TotalEnergies in Courbevoie, France on May 24. Credit: Stephane De Sakutin/AFP via Getty Images Related Read For existing funds under those names, asset managers will have to either sell off incompatible stocks or rebrand. If all funds were to keep their current names, the sectors most affected by potential divestments would include energy, industrials and basic materials, according to Morningstar. This is because funds simply called “ESG” or “SRI” will no longer carry companies deriving significant revenue from oil and gas or coal industries. The terms “impact,” “sustainability” or “environmental” will also be incompatible with such investments. Asset managers can trade oil and gas companies in “transition funds” as long as they demonstrate that they are on a measurable path to social and environmental transition. TotalEnergies, a major French oil and gas company, is currently held by 356 ESG funds at risk of losing their designation, according to Morningstar. To retain their ESG status, these funds would need to divest $3.5 billion from TotalEnergies, just 2 percent of the company’s market capitalization. TotalEnergies did not immediately respond to questions about ESMA’s new guidelines. Overall, 60 U.S. companies, half of which are oil and gas producers, will be excluded from ESG funds. Notable companies affected include Shell, ExxonMobil and BP, which are held in hundreds of ESG funds in the EU. Under the new ESMA rules, managers of “impact” funds will need to ensure their investments contribute to an environmental or social objective. This includes activities that strengthen carbon sinks, production of clean fuels and energy, or projects for climate change adaptation. Similarly, “sustainability” funds can be used to invest in companies that meet EU sustainability benchmarks. This includes projects that commit to reducing water use and greenhouse gas emissions, or to tackling inequality. Both of these categories categorically exclude coal, oil, gaseous fuels and high-emitting electricity production. Managers can name a fund “transition” as long as it meets transition benchmarks, and only excludes tobacco and weapon companies—not fossil fuels. Transition activities are ones where low-carbon alternatives are not yet available but that minimize emissions as much as possible. ESG Ambiguity Globally, the question of what qualifies as ESG investing persists. To know where their money is going, individual investors have to dig deep into their exchange-traded funds (ETFs) and mutual funds’ prospectuses. And even then, it’s not always clear what companies to look out for. Nathan de Arriba-Sellier, director of the Erasmus platform for sustainable value creation, explains that there is considerable ambiguity clouding the debate. “There is confusion between sustainability and ESG,” he said. “And there’s also a distinction between ESG performance and ESG solutions.” An electric vehicle company like Tesla, he explained, provides sustainability solutions. Yet, because of a lack of low-carbon strategy and several workplace-related issues, the company was removed from the S&P 500 ESG Index in 2022. (Despite Elon Musk calling ESG metrics a “scam”, the company was returned to the index the following year.) Fossil fuel companies, on the other hand, earn a majority of their profits from unsustainable, high-emitting activities. Nonetheless, if they demonstrate efforts to reduce emissions and environmental impact, they could achieve an ESG rating similar to Tesla’s. TotalEnergies, for example, invests in renewable energy projects that it claims will help in the transition to net zero. Whether these projects are enough to qualify one of the world’s largest oil companies as an ESG stock is debatable, experts say. The company does not have plans to cut greenhouse gas emissions significantly until 2030 and faces court cases over environmentally damaging drilling projects in Uganda and Tanzania. De Arriba-Sellier stressed the urgency of fossil fuel companies’ transition. ESG funds can be a tool to get there, he said, but substantive efforts are still lacking. “Those companies need to transition,” he said. “They’re also the ones sitting on their hands and digging their own grave.” The goal of these naming conventions is not to exclude oil and gas industries from ESG funds, Behar explained, but to ensure transparency for investors. “It’s about accuracy, truth, and labeling,” he said. “Investors should know exactly what they are getting in their mutual funds.” Currently, it’s challenging for American investors to discern the companies in their mutual funds, 401(k), or 403(b) plans. Third-party tools, some developed by As You Sow, help investors scrutinize their plans, but regulatory progress to standardize the practice is slow. In 2023, the Securities and Exchange Commission introduced an 80/20 rule, which requires at least 80 percent of a fund’s investments to be aligned with its name. The rule might not prevent American ESG funds from holding fossil fuel stocks altogether (82 percent of them do), but it’s a step in the right direction, said Behar. “It’s about the maturation of ESG investing,” he said. “It took the SEC 90 years to get there.” In the EU, the effectiveness of regulating what asset managers can name their funds using the new rules remains to be seen. Experts like de Arriba-Sellier note that enforcement by domestic security regulators could lead to varying standards across the bloc. This story is funded by readers like you. Our nonprofit newsroom provides award-winning climate coverage free of charge and advertising. We rely on donations from readers like you to keep going. Please donate now to support our work.