ESMA Opens Consultation on Fund Names

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    Stockholm (NordSIP) – Funds’ names are a powerful marketing tool and the incorporation of eye-catching key-words such as ‘ESG’ or ‘Sustainable’ in the name of a fund can go a long way to attract investors. The issue was raised at the end of 2021 by a survey conducted by Sweden’s financial services authority (FSA), Finansinspektionen, which found evidence of funds making such titular claims without any evidence to that effect.

    Now, the European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, is taking action. In a recent announcement, ESMA invited Europeans to provide input to a consultation on draft guideline regarding the use in funds’ names of ESG or sustainability-related terms. ESMA will consider all comments received by 20 February 2023.

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    According to the announcement, ESMA argued that “that ESG- and sustainability-related terms in funds’ names should be supported in a material way by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy” so as not to mislead investors. The consultation is particularly interested on stakeholders’ view of quantitative thresholds for the minimum proportion of investments sufficient to support the inclusion of ESG or sustainability-related terms in funds’ names.

    “With this consultation, ESMA continues to prioritise promoting transparency and tackling the risk of greenwashing as identified in the ESMA Strategy and Sustainable Finance Roadmap,” Verena Ross (Pictured), ESMA Chair, said. “This consultation seeks the views of stakeholders on a proposal to promote supervisory convergence in the assessment by NCAs of the use of ESG or sustainability-related terms in funds’ names. The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims while providing both NCAs and asset managers with clear and measurable criteria to assess names of funds including ESG or sustainability-related terms,” Ross added.

    The main elements of the consultation paper on draft guidelines for the use of ESG or sustainability-related terms in funds’ names on which ESMA is seeking stakeholders’ feedback are:

    • a quantitative threshold (80%) for the use of ESG related words;
    • an additional threshold (50%) for the use of “sustainable” or any sustainability-related term only, as part of the 80% threshold;
    • application of minimum safeguards to all investments for funds using such terms (exclusion criteria);
    • additional considerations for specific types of funds (index and impact funds).

    ESMA proposes that the draft guidelines would become applicable from 3 months after the publication of their translation on the ESMA website. Furthermore, a transitional period of 6 months is suggested for those funds launched prior the application date, in order to comply with the Guidelines.

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