EU Issues New Rules for Funds Using “ESG” or “Sustainability” Names to Address Greenwashing Risk
The European Securities and Markets Authority (ESMA) has released finalized guidelines for the use of ESG (Environmental, Social, and Governance) and sustainability-related terms in investment fund names. These guidelines include investment thresholds required for sustainable investment funds and the establishment of a transition category for investments that are not yet green but are progressing towards environmental sustainability goals.
Key Points:
- Investor Demand and Greenwashing Risk:
- ESMA developed the guidelines due to a significant increase in investor demand for ESG-focused funds.
- There has been a sharp rise in the use of sustainability-related terms in fund names, increasing the risk of greenwashing.
- A recent ESMA study found a more than fourfold increase in the use of ESG terms in fund names over the past decade.
- Consultation and Initial Proposals:
- ESMA launched a consultation on proposed guidelines in November 2022.
- Initial proposals included:
- An 80% investment threshold for using ESG-related words.
- A 50% threshold for using “sustainable” or related terms.
- Exclusion criteria based on the EU’s rules for Paris Aligned Benchmarks (PABs).
- Feedback and Final Guidelines:
- Investor groups criticized the different thresholds for ESG and sustainability-related terms, suggesting potential confusion.
- In response, ESMA removed the 50% sustainability-related threshold.
- The final guidelines retain the 80% investment threshold for both ESG and sustainability-related terms.
- Funds must meaningfully invest in sustainable investments.
- Transition Category:
- A new transition category includes terms like “improving,” “progress,” “evolution,” and “transformation.”
- This category also includes an 80% investment threshold.
- Exclusions are based on the EU’s rules for Climate Transition Benchmarks (CTBs) to allow investment in companies with some revenue from fossil fuels.
- Implementation Timeline:
- The new guidelines will apply three months after publication in all EU languages on the ESMA website.
- Additional Context:
- The guidelines aim to protect investors from unsubstantiated sustainability claims in fund names.
- Asset managers are provided with clear criteria for using ESG or sustainability-related terms.
- The guidelines specify exclusion criteria for different terms, such as:
- “Environmental,” “Impact,” and “Sustainability”-related terms: Exclusions according to PAB rules.
- “Transition,” “Social,” and “Governance”-related terms: Exclusions according to CTB rules.
The final report includes a summary of responses to the consultation paper and an explanation of how ESMA addressed the feedback.
Mark, the founder of ESG Today, has a background in investment management and research. He has significant experience in evaluating sustainability factors and holds an MBA from Columbia University and a BBA from the Schulich School of Business.