ESMA proposes name rules for ESG funds

The EU markets regulator and supervisor ESMA, launched a consultation paper on November 18th, 2022, proposing binding rules on the use of ESG and sustainability-related terminology in the names of investment funds.

The proposal aims to protect investors from greenwashing risks, by ensuring that fund names are not misleading. Funds including terms such as “ESG” or “sustainability” must also reflect the funds’ actual investment policies and objectives.

Specifically, the consultation paper proposes:

• For allowing ESG-related terminology in the fund name: At least 80% of the fund’s investments should be used to meet the environmental or social characteristics or sustainable investment objectives in accordance with the binding elements of the investment strategy.
• For allowing wording with “Sustainable” and any derived terms: At least 80% of the fund’s investments, like for ESG terminology, but additionally with a minimum threshold of 50% being “sustainable investments” as defined in Article 2(17) of SFDR.

Regarding the timeframe, ESMA informed that the consultation will run until February 20th, 2023. Once finalized, the draft guidelines will apply three months after their publication on ESMA’s website in all EU official languages.  A transitional period of 6 months is planned to apply for funds already launched before the date of publication.

The consultation comes exactly in times, when also other global regulators such as the UK’s FCA and the US’ SEC are raising the issues linked to misleading funds’ names. On their agenda

• The UK’s FCA proposed a package of new rules in the end of October, which includes sustainability labelling for investment product and restrictions on the use of terms such as ‘ESG’, ‘green’ or ‘sustainable’.
• The US’ SEC proposed earlier this summer Rule Changes to Prevent Misleading or Deceptive Fund Names, including the “80 percent investment policy” suggestion.

Different statistics and sources report about the great reclassification and renaming of sustainable funds, which already started in the last quarter.

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