The ESMA has unveiled its latest effort in combating the growing risk of greenwashing within investment funds, as reported by ESG Today.
ESMA’s finalized guidelines address the use of ESG and sustainability-related terms in fund names, aiming to ensure clarity and transparency for investors in the burgeoning ESG-focused market.
According to ESMA, the surge in investor demand for ESG-focused funds has led to a proliferation of sustainability-related terms in fund names, raising concerns about the potential for misleading investors through greenwashing practices. A recent study by ESMA revealed a significant uptick in the use of ESG terms in fund names across Europe, with some funds even changing their names to incorporate such terms, reflecting the industry’s response to evolving investor preferences.
ESMA’s guidelines, following a consultation initiated in November 2022, initially proposed thresholds for the minimum proportion of investments required to support ESG-related fund names. These thresholds aimed to ensure that funds accurately reflected their stated sustainability objectives.
However, criticism from investor groups prompted revisions to the guidelines, resulting in the removal of the 50% sustainability-related threshold. The final guidelines now mandate an 80% minimum investment proportion to support the sustainability characteristics of funds using the term “sustainable.”
Notably, ESMA’s guidelines introduce a transition category to accommodate investment strategies aimed at fostering a path to a greener economy. This category includes terms such as “improving,” “progress,” and “evolution,” indicating a commitment to meaningful sustainability efforts. Investments in this category must also meet an 80% threshold, aligning with sustainability goals while enabling flexibility for companies transitioning towards greener practices.
The revised guidelines provide clarity on the use of ESG and sustainability-related terms in investment fund names, addressing concerns around greenwashing and enhancing transparency for investors. By establishing clear thresholds and introducing a transition category, ESMA aims to promote integrity and trust within the rapidly expanding ESG investment landscape.
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