In an effort to increase transparency and combat the risks of “greenwashing,” the European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has developed guidelines for the use of sustainability-related terms or ESG principles in fund names. When funds are named “green” or “socially sustainable” but do not actually meet the sufficient sustainability standards to support those names, this becomes particularly relevant.

ESMA aims to develop more specific guidelines on fund names containing ESG or sustainability-related terms and has opened a public consultation to receive feedback. This consultation will close on 20 February 2023 with a view to finalising the guidance afterwards.

ESMA proposes that if a fund’s name contains any ESG-related words, a minimum proportion of at least 80 per cent of its investments 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 the SFDR Delegated Regulation. In the same line, if a fund’s name contains the word “sustainable” or any other term derived from the word “sustainable,” it must allocate at least 50 per cent of its investments to “meet the characteristics/objectives” as defined in Article 2(17) 17 of Regulation (EU) 2019/2088 (SFDR), as disclosed in Annexes II and III of the SFDR Delegated Regulation.

According to ESMA data, 14 per cent of EU-domiciled funds used at least one ESG-related word in their name by July 2022. This information will be important in determining if further analysis and classification of these financial products will be required.

Some questions raised in the consultation include whether it is necessary to introduce quantitative thresholds to assess fund names, whether there are other ways than the proposed thresholds to achieve the supervisory goal of ensuring that ESG or sustainability-related names of funds are aligned with their investment characteristics or objectives and whether minimum safeguards for investment funds with an ESG or sustainability-related term in their name are required.

Contributions should be submitted online at www.esma.europa.eu under the heading ‘Your input – Consultations’ using the response form provided.

ESMA also clarifies that the proposed Guidelines are not intended to interfere with the requirements of the SFDR or the requirements of the Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (the “Taxonomy Regulation”).

We encourage you to follow our news to learn more about the progress of this proposal, and if you have any questions or concerns, please don’t hesitate to get in touch with us.