Stockholm (NordSIP) – The European Union moved another step closer to clearer guidelines on the naming of sustainable investment funds on 14 May 2024 with the publication of the European Securities and Markets Authority’s (ESMA) final report on the subject.
The legislative process began in November 2022 when ESMA launched a consultation on the use of environmental, social, and governance (ESG) and other sustainability-related terms in the naming of investment products. This was triggered by the rapid spread of the practice in the investment industry over the prior decade, with a fourfold increase in the number of funds using such terms. According to ESMA, this had been accompanied by a growth in greenwashing resulting in scepticism and confusion among investors. Many existing investment products were renamed as asset managers jumped on a growing sustainability bandwagon.
Industry feedback taken on board
In publishing its final report, the European regulator has taken into consideration industry feedback received regarding its original recommendations. Funds described as sustainable must be able to prove that a minimum of 80% of assets meet the criteria spelled out in the Sustainable Finance Disclosure Regulation (SFDR) and commit to maintaining that level. ESMA has also added a transition category that allows for the investment of companies deriving some of their revenues from fossil fuels while implementing steps to transition towards low-carbon alternatives. The transition category will be based on the rules governing the EU Climate Transition Benchmarks (CTB).
The new guidelines will also seek to better regulate the use of the term ‘Impact’ by investment fund providers. The use of impact-related terms should be used only by funds meeting the quantitative thresholds and the minimum safeguards, with the intention to generate positive, measurable social or environmental impact alongside a financial return. ESMA has also sought to improve the distinction between environmental, social, and governance terms, with ‘S’ and ‘G’ focused funds residing within the transition category. The stated rational is that such funds could be too restricted in their investment universe by fossil fuel exclusions.
Next steps for fund providers
Despite its publication this week, the final guidelines will not be effective immediately. The report will now be translated into all EU languages and will then be published on ESMA’s website. They will start applying three months after that publication. The transitional period for funds existing before the application date will be six months after that date. Any new funds created after the application date will be expected to apply the guidelines immediately.
