The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, is seeking input on draft guidelines on the use in funds’ names of ESG or sustainability-related terms.

“Funds’ names are a powerful marketing tool. In order not to mislead investors, ESMA believes that ESG- and sustainability-related terms in funds’ names should be 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,” the authority announced.

In this consultation, ESMA is particularly seeking stakeholders’ feedback on the introduction of quantitative thresholds for the minimum proportion of investments sufficient to support the ESG or sustainability-related terms in funds’ names.

Verena Ross, ESMA chair, said: “With this consultation, ESMA continues to prioritise promoting transparency and tackling the risk of greenwashing as identified in the ESMA Strategy and Sustainable Finance Roadmap.”

She added that the consultation is seeking the views of stakeholders on a proposal to promote supervisory convergence in the assessment by national competent authorities (NCAs) of the use of ESG or sustainability-related terms in funds’ names.

The objective, she noted, is to ensure that investors are protected against “unsubstantiated or exaggerated sustainability claims” while providing both NCAs and asset managers with clear and measurable criteria to assess names of funds including ESG or sustainability-related terms.

verena ross esma

Verena Ross at ESMA

The main elements of the consultation paper on draft guidelines for the use of ESG or sustainability-related terms in funds’ names on which ESMA is seeking stakeholders’ feedback are:

  • a quantitative threshold (80%) for the use of ESG related words;
  • an additional threshold (50%) for the use of “sustainable” or any sustainability-related term only, as part of the 80% threshold;
  • application of minimum safeguards to all investments for funds using such terms (exclusion criteria);
  • additional considerations for specific types of funds (index and impact funds).

ESMA is proposing that the draft guidelines would become applicable from three months after the publication of its translation on the ESMA website. Furthermore, a transitional period of six months is suggested for those funds launched prior the application date, in order to comply with the guidelines.

ESMA will consider the feedback it receives to this consultation after it closes on 20 February 2023 with a view to finalising the guidance afterwards.

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