The ESMA the regulatory body overseeing the EU’s financial markets, has released a series of Q&A’s to provide further clarity on the application of guidelines regarding the naming of funds using ESG or sustainability-related terms.
This move aims to foster a consistent understanding and implementation of these guidelines across the financial sector.
The newly published Q&As delve into three critical areas: green bonds, the threshold for “meaningfully investing in sustainable investments,” and the definition concerning the exclusion of controversial weapons. ESMA’s initiative ensures that funds accurately reflect their commitment to sustainability in their names, preventing misleading claims and enhancing investor trust.
For green bonds, the Q&A clarifies that European Green Bonds are exempt from investment restrictions that typically exclude companies not aligned with sustainability goals. This exemption is crucial as the European Green Bonds Regulation is set to take effect soon, highlighting its priority over sector-specific legislation such as the AIFMD and UCITS Directive. For non-European green bonds, fund managers are advised to employ a “look-through” approach to verify if the financed activities adhere to the established exclusion criteria.
Additionally, the Q&A on sustainable investments establishes a baseline, stating that funds should not claim to be “meaningfully investing in sustainable investments” if sustainable assets comprise less than 50% of the portfolio. This definition aims to standardise practices across funds and prevent the dilution of the term ‘sustainable investments’.
Regarding controversial weapons, ESMA specifies that the exclusion criteria should align with the Sustainable Finance Disclosure Regulation (SFDR) principal adverse impact indicator 14. This standardisation ensures a unified approach to defining what constitutes a controversial weapon within investment portfolios.
The guidelines and clarifications provided by ESMA are part of a broader effort to enhance transparency and integrity within the ESG investment space, responding to growing investor demand for genuine sustainable investment options.
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