Updates on ESG Fund Naming Rules
The European Securities and Markets Authority (ESMA) has updated the naming rules for ESG funds, aiming to standardize ESG funds and sustainable funds and avoid greenwashing.
ESMA believes that fund names are effective marketing tools. If the fund name contains ESG and sustainable development terms, these characteristics need to be reflected in the fund’s investment objectives and policies to avoid misleading investors. This update refers to multiple stakeholders such as asset management companies and investors.
Related Post: ESMA Releases ESG Fund Naming Report
Adjustments to Sustainable Fund Naming
ESMA stipulated in previous documents that if a fund uses sustainable terms in its name, it needs to invest at least 50% of its funds in sustainable assets. This adjustment cancels the 50% investment threshold requirement and requires sustainable funds to meet:
- Invest a minimum of 80% assets that achieve sustainable characteristics and objectives.
- Exclude terms consisted with the Paris-aligned Benchmark (PAB).
- Invest in sustainable assets that defined in SFDR Article 2(17).
Adjustments to the Fossil Fuel Related Funds
In previous documents, ESMA cited the PAB’s restrictions on investment in fossil fuels, which may affect some transition funds. These funds may invest in some fossil fuel-related assets for a long time. ESMA has introduced a new category named Transition Funds. In addition to the 80% threshold, funds also need to meet the requirements of the Climate Transition Benchmark (CTB). Unlike PAB, CTB still allows fossil fuel investments.
ESMA believes that the transition fund category will be different from traditional ESG funds because investors generally believe that environmental, social and governance funds should not invest in fossil fuel-related assets. ESMA stipulates that CTBs can be used to invest in these assets if transition related terms are presented in the fund name, but the fund needs to provide a clear and measurable transition path.
Timeline for New ESG Fund Naming Rules
ESMA plans to publish rules in the second quarter of next year, and it will become applicable in three months. New ESG funds need to comply with these rules once they apply, and previous ESG funds have six months to adjust.
Reference:
ESMA Proposes Changes and Updates Timeline for Guidelines on Funds’ Names
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