ESMA Guidelines Address Greenwashing Through Fund Names

The European Securities and Markets Authority (ESMA) has released its final report, providing guidance on the use of environmental, social, and governance (ESG) and sustainability-related terminology in fund names.

This guidance, issued on Tuesday, follows a consultation initiated in November 2022. ESMA’s stance is that ESG and sustainability 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.”

According to a press release from ESMA, the guidance will be implemented three months after it has been translated and published on the regulator’s website, with a transition period of six months. The guidance specifies that if a fund includes any ESG-related terms in its name, at least 80 percent of its investments must be used to achieve the environmental or social characteristics or sustainable investment objectives, in line with the binding elements of the investment strategy. Terms that fall under this guidance might include “green,” “climate,” “impact,” or “transition.”

Regulators in other regions have also taken measures to address the risk of “greenwashing” through fund names. In September, the U.S. Securities and Exchange Commission adopted amendments to its rule on fund names to ensure the regulation adequately addresses ESG concerns, using a similar 80 percent threshold.

Additionally, in November, the U.K. Financial Conduct Authority implemented an anti-greenwashing rule package, which includes increased scrutiny on how firms use terms like “ESG,” “green,” and “sustainable” in their marketing to ensure that such claims are fair, clear, and not misleading.

By fLEXI tEAM