New rules for funds with ESG names in EU

This week we want to share why the European Securities and Markets Authority (ESMA) has found the fund industry’s use of sustainability terms could imply potential greenwashing, and thus why it has recently issued new rules for funds using ESG or sustainability terms in names.

Last October, ESMA published a report that shows an increase in European investment funds using ESG terms in their names over the past decade. That could indicate a trend towards more sustainable investing, or it could also indicate greenwashing, as many funds use quite vague ESG terms. Since demand for ESG funds is high, regulators globally are trying to make sure products that are marketed as sustainable are truly sustainable.

While it would be interesting to read the report in full (to make sure you don’t fall prey of any malpractices and understand the full context of what got us here), here are some of the key highlights:

• The study is based on natural language processing of a dataset that includes information from 36,000 funds managing EUR 16 trillion in assets and over 100,000 documents, including regulatory and marketing materials.
• “…funds increasingly use ESG related language in their names, and that investors consistently prefer funds with ESG words in their name…”
• “Our findings support recent efforts by policymakers to ensure that EU funds’ names and disclosures accurately reflect their activities.”
• While SFDR help disclose sustainable activities in funds, they do not establish standardized requirements, criteria, or thresholds to designate a fund as ESG compliant.
• “…funds prefer to include less-specific words (i.e. broad ESG words rather than more specific ‘E’ or ‘S’ words).”
• “funds sold to retail investors are associated with more extensive ESG language in the KIIDs/KIDs compared with funds sold to institutional investors, but this effect does not exist for the investment strategy or the marketing material.”
• “Going forward, ESMA will continue to scale up the monitoring and supervision of greenwashing.”

With this context, ESMA set to work on guidelines and after a consultation period it recently published a final version of them. Among other things, the recently published guidelines set a requirement for:

1. “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.”
2. “If a fund has the word “sustainable” or any other term derived from the word “sustainable” in its name, it should allocate, within the 80% of investments to “meet the characteristics/objectives”, at least 50% of minimum proportion of sustainable investments as defined by Article 2(17) of Regulation (EU) 2019/2088 (SFDR).”

Accurate ESG disclosures are crucial for investor confidence and the effective allocation of capital towards sustainable investments. Preventing greenwashing is essential to maintaining trust and ensuring that substantial financial resources are directed towards the transition to a greener economy.

I hope you found this interesting. As usual, if there is anything we can help you with, or if there is an ESG topic you would like to know more about, please let us know.

Best,

Marimar

CEO, Miranda ESG