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New ESMA Guidelines Tackle Greenwashing in Fund Names

Cover of ESMA's Final Report on Guidelines for Using ESG or Sustainability Terms in Fund Names, May 14, 2024.

The European Securities and Markets Authority (ESMA), the EU's financial markets regulator, has finalized new guidelines for using ESG (Environmental, Social, Governance) and sustainability-related terms in fund names.


These guidelines, published on May 14, 2024, aim to protect investors from misleading sustainability claims and to provide asset managers with clear criteria for fund naming conventions.



Investment Thresholds and Exclusion Criteria


The guidelines mandate that funds using ESG or sustainability terms in their names must ensure that at least 80% of their investments align with specific environmental, and social characteristics or sustainable investment objectives. This is to prevent funds from misleading investors with unsubstantiated claims of sustainability.


Exclusion criteria have also been specified for various sustainability-related terms:


  • Environmental, Impact, and Sustainability Terms: These funds must meet the rules applicable to Paris-aligned Benchmarks (PAB).


  • Transition, Social, and Governance Terms: These funds must adhere to the rules for Climate Transition Benchmarks (CTB).


The guidelines specify further criteria for funds using a combination of terms to ensure clarity and avoid confusion.




Adjustments and Responses to Feedback


Following the consultation paper and stakeholder feedback, ESMA made several adjustments:


  • Removal of the 50% Threshold: Initially, a 50% threshold for sustainable investments was proposed but later removed due to concerns about its practical application.


  • Introduction of a Transition Category: Terms such as "improving," "progress," "evolution," and "transformation" now fall under a transition category, encouraging investment in companies on a positive trajectory toward sustainability.


  • Specific Recommendations: Funds using transition, social, and governance-related terms must meet the 80% threshold and apply CTB exclusions only.



Implementation and Next Steps


The guidelines will be translated into all EU languages and published on the ESMA website. They will take effect three months after publication. Competent authorities must notify ESMA within two months of publication whether they comply or intend to comply with the guidelines.


Existing funds have a six-month transitional period to adhere to these new guidelines, while new funds must comply immediately.



Promoting Transparency and Accountability in Fund Names


ESMA's new guidelines mark a significant step in promoting transparency and accountability within the investment sector. By establishing clear criteria and thresholds for using ESG and sustainability-related terms, these guidelines aim to curb greenwashing and ensure that investors can trust the sustainability claims of the funds they invest in.


This initiative underscores ESMA's commitment to enhancing investor protection and fostering genuine sustainable investment practices in the EU.


For more information, visit the ESMA website.


 

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