ESMA New Greenwashing Rules for Investment Fund Names
Last week, the European markets regulator, European Securities and Markets Authority (ESMA), announced its final guidelines for investment funds using “green” terms in their names. These guidelines will be in effect from three months after their publication in all EUB languages on the ESMA website, with a total transition time of six months for existing funds.
According to the ESMA, interest in sustainable investments has grown dramatically in recent years, providing an incentive for funds to market themselves accordingly. Thus, these new rules are placed to address a new need in the industry, with the proportion of funds using such terms increasing four-fold in the past 10 years, according to one ESMA study.
In the finalised version of the guidelines, which has changed slightly since the proposal was first introduced in November 2022, investments must meet a requirement of 80% minimum in sustainable causes to meet the criteria for terms like “sustainable” in investment names, with exclusions according to Paris-Aligned Benchmarks (PABs). There must also be a commitment to investment in truly sustainable causes.
The final guidelines do include a transition category, featuring terms such as “improving”, “evolution”, and “progress” or terms related to “social” or “governance”. This also contains the 80% investment threshold but applies the exclusions of the EU’s rules for Climate Transition Benchmarks (CTBs) to allow for investment in companies which still derive some revenue from fossil fuels.
The document also includes guidance in the event of a combination of these two categories.
Other markets have enacted similar regulations recently. Last September, the US Securities and Exchange Commission (SEC) amended its ruling to include fund names in scope and set a similar 80% threshold for investments. Likewise, the UK Financial Conduct Authority passed an anti-greenwashing packaging in November which added criteria for how firms use terms such as “ESG”, “green”, and “sustainable” in their marketing in an effort to reduce unfair or misleading claims.
With investors and legislators alike increasingly interested in sustainability, many sectors may have to adopt such new guidelines to ensure fair competition and proper compliance with the EU’s increasing legal requirements. Companies in all industries will be expected, whether by legal obligation or by consumer scrutiny, to back-up their sustainability claims.
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Author: Marie Gomersall, Sustainability Expert at EFF
Sources:
- Brasseur, Kyle. “ESMA guidelines tackle greenwashing via fund names.” Compliance Week. 17 May 2024.
- ESMA. “ESMA Guidelines establish harmonised criteria for use of ESG and sustainability terms in fund names.” 14 May 2024.
- Segal, Mark. “EU Issues New Rules for Funds Using “ESG” or “Sustainability” Names to Address Greenwashing Risk”. ESG Today. 14 May 2024.