Mixed Responses to ESMA Consultation on Fund Names

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    Stockholm (NordSIP) – Fund names are a powerful marketing tool, and incorporating keywords such as ‘ESG’ or ‘Sustainable’ in the name of a fund can go a long way to attracting investors, making it a fertile ground for greenwashing. Aware of the problem, European authorities have recently accelerated their efforts to provide counteraction. In the wake of the joint Call for Evidence on greenwashing initiated by the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs), the European Securities and Markets Authority (ESMA) has been conducting its own consultation on future Guidelines on funds’ names using ESG or sustainability-related terms.

    Many stakeholders took the opportunity to respond to ESMA’s consultation by the stated deadline, 20 February. Financial actors, in general, seem to welcome an in-depth discussion about the implicit sustainability credentials embedded into fund names and support the idea of setting common rules in order to guarantee that sustainability-related claims and commitments are in line with the reasonable expectations investors can have.

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    That said, several respondents have expressed serious concerns regarding the numerical threshold approach proposed by ESMA. The main reason for being sceptical about this methodology is that definitions of concepts and underlying data are not yet finalised and might prove difficult to quantify.

    “It is unlikely that a methodology built on an unclear legal definition will increase investor understanding of ESG funds and adequately address greenwashing concerns,” comments Anyve Arakelijan, Regulatory Policy Adviser at the European Fund and Asset Management Association (EFAMA), one of those criticising the approach. “Rather than imposing a threshold, it would be more proportionate to mirror ESMA’s supervisory guidance on sustainability risks and disclosures by ensuring that use of ESG-related terms is supported in a material way with sufficient evidence of sustainability characteristics in the fund’s investment objectives and strategy.”

    The Securities and Markets Stakeholder Group (SMSG) is not convinced by the proposed quantitative threshold approach either. “This quantitative proposal may miss its goal at this stage of development of the sustainable finance framework,” the association writes in its statement. “Thus, the SMSG considers that a two-step approach (qualitative first and quantitative at a second stage) may be a more appropriate approach.”

    One of the stakeholders taking a less critical stance on ESMA’s threshold proposal is Eurosif, the pan-European association promoting Sustainable Finance. “Eurosif supports the idea of introducing minimum sustainability criteria for the different product categories to guarantee that sustainability-related claims and commitments are in line with the reasonable expectations investors can have,” states the association’s response. “However, this should happen together with adjusting the SFRD framework to provide sufficient clarity on the different concepts and clearly delineating different SFDR product categories,” Eurosif adds.

    Whether ESMA decides to proceed with the numerical threshold approach, some important elements would still need to be addressed. One of these is how to treat cash, cash equivalents, and derivatives. In its response to the consultation, EFAMA argues, for instance, that cash and derivatives used for hedging “should be excluded from an 80% ratio calculation to allow for efficient fund management, especially during extraordinary market circumstances.”

    The derivatives question is also highlighted in response to ESMA’s consultation sent by the International Swaps and Derivatives Association (ISDA). The association argues that “a common cross-industry methodology for the calculation of the minimum proportions of sustainable investments for derivatives transactions is paramount to maintain ESMA’s goal of promoting standardised disclosures, and requests that ESMA gives the industry sufficient time to form a consensus on the calculation thresholds for derivatives.”

    Although the consultation is over, there still appear to be plenty of questions for ESMA to consider before finalising the guidelines on funds’ names using ESG or sustainability-related terms.

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