The European Securities and Markets Authority (ESMA) has published the final report which ‘establishes harmonised criteria’ for fund names using ESG- or sustainability-related terms.
The objective of the guidelines is to help investors not fall for claims of greenwashing with ‘unsubstantiated or exaggerated’ sustainability claims in fund names. The guidelines also aim to help asset managers in providing ‘clear and measurable’ criteria to assess their ability to use ESG- or sustainability-related terms when naming funds.
ESMA originally consulted in November 2022 on guidelines or investment funds using sustainability-focused terms in their names. The initial proposal recommended a minimum threshold for funds to support ESG- and sustainability-related nomenclature; 80% for ESG-related words, related to SFDR, and 50% for the use of ‘sustainable’ and associated terms. This was combined with exclusion criteria from the PAB (Paris-Aligned Benchmarks) rules.
The final report confirmed a uniform 80% threshold. “The guidelines establish that to be able to use these terms, a minimum threshold of 80% of investments should be used to meet environmental, social characteristics or sustainable investment objectives,” ESMA noted.
One new area is around ‘transition-related’ terms. Words such as ‘improving’, ‘progression’, ‘evolution’ and ‘transformation’ are applicable, again with an 80% threshold. “The introduction of this category of terms is designed not to penalise investment in companies deriving part of their revenues from fossil fuels, thus promoting strategies aimed to foster a path to transition towards a greener economy,” the report noted.
The rise of ESG- and sustainability-related terms in investment funds has been evident – and there is still plenty of work to be done. At the beginning of 2023, the ESMA warned that less than 1% of funds analysed met the ‘Ecolabel’ 50% portfolio greenness threshold, as well as certain exclusionary criteria.
In October, an ESMA report found that the share of EU UCITS funds with ESG words in their name had increased by more than 10 percentage points over the past decade. Fund managers ‘tend to prefer using generic language rather than more specific words’, the authority noted, leading to potential greenwashing concerns for investors.
The reality is not entirely clear cut, as an accompanying article explained. “Of course, there may be good reasons for a fund manager to prefer using less specific ESG words in their name… for example, less specific words can enable a fund to be more flexible in terms of its asset allocation over time, and also to target a relatively more diversified portfolio,” the article said.
“Nevertheless, it is also true that, if a fund were indifferent with respect to diversification and allocation flexibility, the use of more specific words would also make it easier for investors to verify whether the fund portfolio is in line with the name.”
The final guidelines will start applying three months after translation into all EU languages and publication on ESMA’s website.
