ESMA is Concerned about ESG Greenwashing
The European Securities and Markets Authority (ESMA) recently issued guidelines, which put forward new requirements for the naming of ESG funds. ESMA believes that if the fund is named as “ESG Fund” or “Sustainable Fund”, but the investment category does not meet the relevant standards, it may bring green washing risk. To this end, the European Securities Regulatory Commission is drafting new rules on the naming of ESG funds and soliciting opinions.
How to Name a ESG Fund
ESMA believes that the name “ESG Fund” can be used only when the investment objective and investment strategy of the fund are consistent with ESG and sustainable characteristics. For this reason, ESMA adopts quantitative threshold to specify the investment scope and content of the fund. It is divided into the following two categories:
- “ESG Fund” can only be used when at least 80% of the fund’s investment is related to ESG;
- The “Sustainable Fund” can only be used when at least 50% of the minimum investment (80%) of the “ESG Fund” for ESG is related to sustainability;
For example, if a fund has a total size of 1 billion US dollars and at least 800 million US dollars are invested in the ESG direction (assuming 900 million US dollars), then the name “ESG Fund” can be used. In the $900 million ESG investment, if at least $400 million (half of the minimum $800 million) is invested in the sustainable direction, the name “sustainable fund” can be used.
ESMA believes that the 80% threshold is enough to meet investors’ expectations for ESG funds, so as to avoid the deceptive nature of fund names. At the same time, the adoption of consistent numbers across Europe will help asset managers to comply with naming rules. Of course, at least 50% of the minimum ESG investment of 80% is invested in the sustainable direction, which can also well demonstrate the sustainable characteristics of the fund. In addition, ESMA stipulates that “impact investment fund” can only be used in its name if it meets the above requirements.
Adjustment Time of Non-compliant ESG funds
ESMA is currently soliciting opinions on this naming rule for three months, which will be issued as a formal regulation. After the official naming rules are released, ESG funds that do not meet the relevant provisions have six months to change their names.