28 sty 2023
Public consultation of the EU guidelines for use of the ESG and sustainability related terms in funds names are pending
European Securities and Market Authority (ESMA) identified that among 29,701 funds domiciled in the EU, 4,192 used ESG/sustainability-related words in their names. In order to prevent greenwashing by using "catchy" names, ESMA prepared and presented for public consultation a paper to introduce guidelines on funds’ name (https://www.esma.europa.eu/sites/default/files/library/esma34-472-373_guidelines_on_funds_names.pdf).
The proposed solution is to introduce two thresholds. The first one concerns using any ESG- or impact-related words. It was proposed that a fund which wants to have a name using such expression in its name has to allocate minimum 80% of its investments in products that meet the environmental or social characteristics or sustainable investment objectives. The second threshold – allowing to use a “sustainable-related word in the name” – will be met if within the above first threshold, at least 50 % of investment is allocated in sustainable investments.
ESMA provided a few examples to understand the above rules. If the fund’s name is “Climate Change Solutions Fund”, it should be classified as a name which relates to the “ESG” threshold only. Thus, if the fund commits to making at least 90% of its investments to attain the characteristic promoted by the financial product, it will be in compliance with the proposed guidelines. The other example given is “Sustainable Society Fund” which commits to allocate 80% in investments aligned with “social” characteristics (classified as falling within the ESG threshold) and only 20% in sustainable investments. ESMA stresses that the use of “Society” in the fund’s name will be in line with the guidelines, but the fund will not be in compliance with the guidelines if it keeps a reference to “sustainable” in its name (as it doesn’t meet the 50% threshold).
ESMA will be gathering comments on the proposed guidelines until 20 February 2023. Once the consultations are over, it is planned that the final draft of the guidelines will be translated, published, and become effective within 3 months of publication. The affected entities will have 6 months to adapt their investment portfolio to ensure they meet the required thresholds to keep or change their name. These proposed timeframes are also subject to public consultation.