The European Securities and Markets Authority (ESMA) is considering limiting the use of environment, social and governance (ESG) or sustainability-related terms in fund names.
The European watchdog, which has launched a consultation paper on draft guidelines for the use of ESG or sustainability-related terms in funds’ names on which ESMA is seeking stakeholders’ feedback are:
ESMA said it also may introduce “quantitative thresholds” for a minimum proportion of investments needed to back up fund names, which it called “powerful” marketing tools.
For example, this could be broken down into an 80% quantitative threshold for the use of ESG related words and an additional 50% for the use of “sustainable” or any sustainability-related term only, as part of the 80% limit.
In order not to mislead investors, ESMA believes that ESG- and sustainability-related terms in funds’ names should be supported in a material way by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy.
“The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims,” Verena Ross, the chair of ESMA.
She added, “If adopted, the rules also would give national supervisors and asset managers “clear and measurable criteria to assess names of funds including ESG or sustainability-related terms.”
ESMA is proposing that the draft guidelines would become applicable from three months after the publication of its translation on the ESMA website.
In addition, it suggested a transitional period of six months for those funds launched prior the application date.
The consultation closes on 20 February 2023 with a view to finalising the guidance afterwards.
The proposed tightening come on the heels of the European Supervisory Authorities (ESAs) launching a probe into into the impact of greenwashing in the sustainability-products market.
The ESAs, which was set up 12 years ago, comprises European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).
