ESMA consultation on the use of ESG or sustainability-related terms in fund names
Published 21 February 2023
Category: Impact and ESG
On 20 February 2023, ESMA closed their consultation on Guidelines on funds’ names using ESG or sustainability-related terms launched back in November 2022.
The consultation was initiated due to the issue around fund managers’ use of the categorization as either an article 8 or 9 fund as a marketing tool even though SFDR is not a labelling regime. Investors and others may be left with the impression that funds have been approved and labelled by the EU and, thus, are meeting specific sustainability standards even though it is a self-identification. ESMA fears that this may promote greenwashing and, in the end, mislead investors. The same concerns have been raised by the EU Commission.
On this basis, ESMA has developed guidelines addressing some of these issues. The name of a fund shall to a greater extend be supported by evidence of sustainability objectives or characteristics in accordance with the investment policy or objectives in the fund. More specifically, ESMA has in their consultation paper asked for feedback on the following main elements:
1) If a fund uses ESG-related words in its name, minimum 80 % of the fund’s investments must be used to meet social or environmental characteristics or sustainable investment objectives as laid down in the investment strategy and disclosed in the pre-contractual disclosures.
2) If a fund uses “sustainable” or other sustainability-related terms in its name, the fund must – within the 80 % of investments proposed under 1) above – allocate at least 50 % of minimum proportion of sustainable investments as disclosed in the pre-contractual disclosures. SFDR article 2(17) defines a sustainable investment as an investment in an economic activity that contributes to an environmental or social objective, provided that such investment does not significantly harm any of those objectives and that the investee companies follow good governance practices.
3) exclusion criteria in the form of minimum safeguards for all investments for funds making use of ESG or sustainability-related terms.
4) additional considerations regarding specific fund types.
Further, ESMA has presented a proposal to increase supervisory convergence when national competent authorities assess funds’ names and their use of ESG or sustainability-related terms. This may prevent unreal sustainability claims and at the same time provide, among others, national competent authorities with criteria for considering fund names.
The proposed guidelines complement the principle-based guidance published in May 2022 and touched upon in a previous update. ESMA does not intend to intervene with existing requirements in the SFDR and Taxonomy Regulation. The proposed guidelines shall, however, apply in relation to the requirements in among others the AIFMD which obliges Member States to ensure that AIFMs conduct honest and fair activities.
Next steps: ESMA will now review and elaborate upon the feedback received during the consultation and on this basis finalize their guidelines which they expect to publish in Q2-Q3 in 2023. Further, the EU Commission is currently conducting a general review of the SFDR and will present their conclusions by end of 2023.
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