The European Securities and Markets Authority (ESMA) announced today the release of its finalized guidelines for the use of ESG and sustainability-related terms in investment fund names. These guidelines include investment thresholds required for sustainable investment funds and the creation of a transition category for investments that are not yet green but are progressing towards environmental sustainability goals.
ESMA explained that the new guidelines were developed in response to a significant rise in investor demand for ESG-focused funds, which has prompted asset managers to incorporate sustainability-related terms in fund names to attract investors, thereby increasing the risk of greenwashing. According to a recent ESMA study, the use of sustainability-related terms in fund names in Europe has surged over the past decade, with the proportion of funds using ESG terms increasing more than fourfold. This trend has been driven by the launch of new ESG-related products and the renaming of existing funds to include sustainability-related terms. The study also noted that fund providers often prefer generic ESG terms, making it difficult for investors to verify the alignment of investments with the fund names.
The finalized guidelines follow a consultation launched by ESMA in November 2022 on proposed guidance. The initial proposal introduced a minimum investment threshold for ESG-related fund names, including an 80% threshold for using ESG-related words and a 50% threshold for using “sustainable” or other sustainability-related terms. It also recommended exclusion criteria based on the EU’s rules for Paris Aligned Benchmarks (PABs), which restrict investments in fossil fuel companies and high GHG-emitting electricity producers.
In the finalized guidelines, ESMA removed the 50% sustainability-related threshold, maintaining an 80% minimum proportion of investments for funds using the term “sustainable” and introducing a requirement for meaningful investment in sustainable investments.
The guidelines also include a transition category with terms such as “improving,” “progress,” “evolution,” and “transformation,” which also requires an 80% investment threshold. This category applies exclusions based on the EU’s rules for Climate Transition Benchmarks (CTBs) rather than PABs, allowing investment in companies that derive part of their revenues from fossil fuels.
The new guidelines will take effect three months after their publication in all EU languages on the ESMA website.
Click here to access the new guidelines.
