EFAMA Commented on ESMA Rules
The European Fund and Asset Management Association (EFAMA) issues a report expressing its opinion on the ESG funds naming rules issued by the European Securities and Market Authority (ESMA).
EFAMA indicates that appropriate ESG funds naming rules will improve the transparency of the market and promote the development of ESG in asset management industry. However, the existing ESG funds naming rules need to be modified in many aspects, and EFAMA has put forward some suggestions.
General Views on Naming Rules
ESMA proposed the ESG fund naming rules scheme last year, which can be summarized as:
- ESG funds need to invest at least 80% of their money in ESG-related assets;
- Sustainability funds need to invest at least 40% of their money in sustainable assets;
EFAMA believes that the existing naming scheme needs to be modified to meet the actual situation and avoid the difficulties for financial institutions and investors in the implementation process. If the changes are not made, some funds may have unintentional greenwashing behavior, while others may choose to give up the ESG strategy because of the naming problem.
Suggestions on the Naming of ESG Fund
EFAMA believes that the ESG fund naming rules require a minimum threshold of 80%, which is difficult to implement in practice. The reasons are as follows:
- Naming rules conflict with existing regulatory policies. SFDR uses Article 8 and Article 9 in fund classification to judge ESG funds. According to ESMA, if Article 8 and Article 9 do not meet the minimum threshold, ESG cannot be included in the fund name. This may confuse investors;
- The naming rules only require capital allocation, ignoring the investment objectives and investment process. EFAMA believes that the existing naming rules require that the allocation results of the fund meet the standards, but it does not include the investment process of the fund and the relevant KPIs. ESMA should consider adding these contents to enhance ESG characteristics;
- The naming rules only emphasize funds and do not involve other financial products. EFAMA believes that the regulatory policy should create a fair environment for all financial products. All ESG-related financial products should meet the some investment restrictions;
EFAMA proposed amendments to the ESG fund naming rules:
- Lower the threshold from 80% to 70%. The current rules do not specify whether to consider cash and derivatives in the calculation, while holding these assets is very important for fund operation. EFAMA believes that the revision to 70% is in line with the actual situation;
- Clarify the definition of ESG assets. To calculate the minimum threshold, ESMA needs to clearly define ESG assets and keep them consistent with the relevant definitions in SFDR;
Suggestions on the Naming of Sustainable Fund
EFAMA believes that there are several problems in setting up a sustainable fund based on the ESG fund:
- Actual proportion of sustainable assets is difficult to reach 50%. According to the analysis of existing Article 8 funds, most funds only invest 20% of their funds in sustainable assets, and nearly half of them only have 10% of sustainable assets. The minimum 40% standard set by ESMA (half of the minimum threshold of 80%) is difficult to achieve;
- The sustainable rules are more biased towards equity funds and may ignore bond funds. In investment, bond funds can choose less sustainable assets than equity funds. If naming rules are adopted, investors may reduce their investment in bond funds;
EFAMA proposed amendments to the naming rules of sustainable funds:
- Reflect sustainability in investment objectives. ESMA should reflect the sustainable objectives in the investment objectives and investment process of the fund, rather than just take the holding of assets as the judgment;
- Only the funds that highly meet the sustainable characteristics are subject to threshold requirements. At present, most sustainable funds are difficult to meet the minimum threshold of 50%, but the threshold can be set for funds such as Article 9;