The ESMA has published a study showing a fourfold rise in the use of ESG-related terminology in the names of European investment funds over the last decade.
This surge comes as fund managers both launch new ESG-related products and rebrand existing funds to include sustainability-linked terms.
The research indicated a trend towards generic ESG descriptors, raising concerns over the ability of investors to validate if their investments genuinely reflect the sustainability claims made by the funds’ names. There was also a notable difference in the usage of ESG claims between documents targeting retail and institutional investors. Specifically, retail-targeted fund documents are more inclined to utilise ESG labels than their institutional counterparts.
ESMA’s study is a part of its broader strategy to counteract greenwashing within the investment management sector. This intention was highlighted in the sustainable finance roadmap that the regulator unveiled last year. ESMA has also initiated a consultation concerning proposed regulations on employing ESG and sustainability-related terms in investment fund names.
With global sustainable fund assets tripling to over €2.1tn in the last three years, ESMA’s report emphasises the accelerated demand for ESG-labelled funds in the EU, outpacing the demand for other funds every quarter for the past six years.
ESMA voiced concerns in its report, stating: “It is necessary that ESG investment products be attractive to investors… However, strong investor demand for ESG products also incentivise greenwashing behaviour among asset managers.”
Over the past decade, the incorporation of ESG-related terms in fund names has expanded from 3% to 14% of assets under management in the EU, totalling €974bn out of a grand €6.8tn AuM. ESMA links this significant growth, especially post-2018, to the 2015 Paris Agreement.
The authority also noted that a substantial number of funds have transitioned to including sustainability-associated terms since 2018. Most of these have favoured general terms like “ESG” or “sustainable”. However, ESMA believes that specificity in terms would offer investors more clarity.
By utilising natural language processing on over 100,000 fund documents, ESMA discerned a higher frequency of ESG claims in retail-focused documents. This discovery underlined the importance of closely monitoring such communication channels.
Concluding its report, ESMA emphasised: “The transition towards a greener economy will require substantial financial resources… it is crucial that investors have confidence that the sustainable financial products offered to them are accurately described.”
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