Asset managers are under increased scrutiny as the European regulator Esma’s fund naming guidelines will mandate an 80% threshold for investments supporting ESG or sustainability goals in fund names, including words like ESG, green and sustainable, among others. Photo: Shutterstock

Asset managers are under increased scrutiny as the European regulator Esma’s fund naming guidelines will mandate an 80% threshold for investments supporting ESG or sustainability goals in fund names, including words like ESG, green and sustainable, among others. Photo: Shutterstock

The EU’s financial markets regulator and supervisor, in its final report on fund naming guidelines, published on Tuesday, has set a stringent 80% threshold for investments aligning with ESG or sustainability objectives, with the aim of enhancing transparency and combating greenwashing.

The European Securities and Markets Authority, the EU’s financial markets regulator and supervisor, its final report on 14 May 2024, regarding guidelines on funds’ names utilising ESG (environmental, social and governance) or sustainability-related terms. One significant adjustment outlined in the guidelines is the requirement for a minimum threshold of 80% of investments to align with environmental or social characteristics, or sustainable investment objectives, as opposed to the earlier threshold of 50%. This change reflects a stricter standard for funds wishing to incorporate these terms into their names, ensuring a more substantial commitment towards ESG or sustainability-related goals. The guidelines maintain the 80% threshold across all terms and criteria outlined within them.

The primary aim of these guidelines is to safeguard investors against unfounded or exaggerated sustainability assertions in fund names while equipping asset managers with precise and quantifiable criteria to evaluate their eligibility to utilise ESG or sustainability-related terms in fund names, the regulator said.

Furthermore, the guidelines introduce exclusion criteria for various terms used in fund names. Terms such as “Environmental,” “Impact” and “Sustainability” are subject to exclusions based on rules akin to Paris-aligned benchmarks (PAB). On the other hand, terms like “Transition,” “Social” and “Governance” are governed by rules akin to Climate Transition Benchmarks (CTB). Additionally, the guidelines offer further specifications for funds combining terms, such as transition, sustainability and impact-related terms, or those referencing an index as a benchmark.

The genesis of these guidelines stems from a public consultation launched by Esma on 18 November 2022, specifically targeting guidelines on funds’ names utilising ESG or sustainability-related terms. This consultation period concluded on 20 February 2023. The 58-page encapsulating the guidelines not only summarises the responses received during the consultation phase but also elucidates on the approach taken to address the feedback garnered.

Moving forward, the guidelines are set to be translated into all EU languages and subsequently published on Esma’s official website. They will come into effect after three months.

Competent authorities within the EU are required to notify Esma within two months of the guidelines’ publication regarding their compliance status. The guidelines also delineate a transitional period of six months for existing funds post-application, while new funds must adhere to these guidelines immediately upon creation.

Related articles