The European Securities and Markets Authority (ESMA) is seeking comments, until February 20, 2023, on the draft guidelines for the use of environmental, social, and governance (ESG) or sustainability-related terms in the names of funds. Additionally, ESMA published Questions and Answers (Q&A) on the Sustainable Finance Disclosure Regulation (SFDR) Delegated Regulation (2022/1288).
The draft guidelines on ESG terminology complement the supervisory briefing by ESMA, published on May 31, 2022, that contained principle-based guidance for national competent authorities on fund names using ESG and sustainability-related terms. The draft guidelines address funds’ names by proposing quantitative thresholds criteria for the use of ESG and sustainability-related terminology, which would further help to prevent potential greenwashing risk in fund names. The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims while providing both national competent authorities and asset managers with clear and measurable criteria to assess names of funds using ESG or sustainability-related terms. The name of a fund is an instrument to communicate information about the fund to investors and is also an important marketing tool for the fund. The name of a fund is usually the first fund attribute investors see and, while investors are expected to look beyond the name itself and check in detail the fund’s documentation, the name can have a significant impact on their investment decisions.
ESMA highlights that the use of ESG and sustainability-related terminology in fund names should be used only when supported in a material way by evidence of sustainability characteristics, or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy, and its strategy as described in the relevant fund documentation. To tackle greenwashing risk in funds, ESMA is seeking feedback on proposals to introduce quantitative thresholds for the minimum proportion of investments sufficient to support the ESG or sustainability-related terms in funds’ names to ensure that marketing communications are clear, fair, and not misleading. These proposals include the following:
- If a fund has any ESG-related words in its name, a minimum proportion of at least 80% of its investments should be used to meet the environmental or social characteristics or sustainable investment objectives in accordance with the binding elements of the investment strategy, as disclosed in Annexes II and III of SFDR Delegated Regulation (2019/2088).
- If a fund has the word “sustainable” or any other term derived from the word “sustainable” in its name, it should allocate at least 50% on sustainable investments within the 80% threshold.
- Application of minimum safeguards, consisting of the exclusion criteria, that might be necessary for remaining investments of the funds (that is, investments not used to meet the environmental or social characteristics or objectives of the fund).
- Additional considerations for specific type of funds, for example, index funds could use ESG and sustainability-related words in their name only if the relevant thresholds proposed are met by the fund whereas funds using the word “impact” or “impact investing” or any other impact-related term in their name should meet the proposed thresholds and additionally make investments with the intention to generate positive and measurable social or environmental impact alongside a financial return.
ESMA proposed that these guidelines would become applicable from three months after the publication of their translation on the ESMA website. Furthermore, a transitional period of six months is suggested for those funds launched prior the application date, to comply with the guidelines.
Keywords: Europe, EU, Banking, Securities, ESG, Sustainable Finance, SFDR, Q A, Sustainability, Greenwashing, Fund Names, SFDR Regulation, ESMA
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