On May 14, 2024, the European Securities and Markets Authority (ESMA) has published its final report: “Guidelines on funds’ names using ESG or sustainability- related terms“ to address greenwashing risk stemming from ESG- or sustainability-related terms used in investment fund names.
The purpose of these guidelines is to specify the circumstances where the fund names using ESG or sustainability-related terms are unfair, unclear, or misleading. With regard to this, ESMA provides explanations of key terms under these guidelines.
ESMA states that “the need to enhance investor protection is particularly evident when funds use terms which suggest an investment focus in companies that meet certain sustainability standards. This type of terminology is particularly powerful in fund names, as funds can attract significant interest and stand out to investors by using sustainability or ESG-related terms in their names.”
Within the guidelines ESMA recommends that funds (and ETFs) using environmental, governance, impact, social, sustainability, and transition-related terms should meet an 80% threshold linked to the proportion of investments used to meet environmental or social characteristics or sustainable investment objectives in accordance with the binding elements of the investment strategy which are to be disclosed in Annexes II and III in line with the regulatory technical standards (RTS) CDR (EU) 2022/1288. These RTS are specifying the details of the content and presentation of the information in relation to the principle of “do no significant harm,” specifying the content, methodologies, and presentation of information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports.
In addition, funds (and ETFs) using environment or impact-related terms should apply exclusions in line with the EU’s Paris-aligned benchmark regulation (article 12[1] [a] to [c] of CDR [EU] 2020/1818), while those using sustainability, transition, social and governance-related terms should adopt exclusions in line with the climate transition benchmark rules (article 12[1] [a] to [g] of the CDR [EU] 2020/1818).
Funds (and ETFs) with names containing sustainability-related terms should additionally “commit to invest meaningfully in sustainable investments,” as referred to in article 2 (17) of the Sustainable Finance Disclosure Regulation (SFDR), the guidelines continue.
The guidelines come into force three months after the date of the publication of the guidelines on ESMA’s website in all EU official languages.
Managers of any new funds created after the date of application of the guidelines should apply these guidelines immediately in respect of those funds. Managers of funds existing before the date of application of these guidelines should apply these guidelines in respect of those funds after six months from the application date of the guidelines.
This article is for information purposes only and does not constitute any investment advice.
The views expressed are the views of the author, not necessarily those of Lipper or LSEG.
