The European Securities and Markets Authority (ESMA) published its final report containing guidance for the use of environmental, social, and governance (ESG)- and sustainability-related terminology in fund names.
The guidance, issued Tuesday, follows a consultation launched in November 2022 that reflected ESMA’s view that ESG- and sustainability-related terms in fund 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.”
ESMA said in a press release the guidance would apply three months after translation and publication onto the regulator’s website, with a transition period of six months.
If a fund has any ESG-related words in its name, at least 80 percent of its investments should be used to meet the environmental or social characteristics or sustainable investment objectives in accordance with the binding elements of the investment strategy, the guidance states. Such terms might include “green,” “climate,” “impact,” or “transition.”
Regulators in other regions have taken similar steps to address the potential of “greenwashing” occurring via fund names. In September, the U.S. Securities and Exchange Commission adopted amendments to its rule covering fund names to ensure the regulation is appropriate to address ESG matters. It uses a similar 80 percent threshold.
In November, the U.K. Financial Conduct Authority passed an anti-greenwashing rule package that included added scrutiny to how firms use terms like “ESG,” “green,” and “sustainable” in marketing to ensure any such claims are fair, clear, and not misleading.
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