EU Issues New Rules for Funds Using “ESG” or “Sustainability” Names to Address Greenwashing Risk

The European Securities and Markets Authority (ESMA) has released finalized guidelines for the use of environmental, social, and governance (ESG) and sustainability-related terms in investment fund names. The guidelines aim to address the increased risk of greenwashing as investor demand for ESG-focused funds grows. ESMA found that the use of sustainability-related terms in fund names has significantly increased in Europe, leading to concerns about the alignment of investments with fund names. The guidelines introduce investment thresholds for sustainable investment funds and establish a transition category for investments that are not yet fully green but are progressing towards environmental sustainability goals. ESMA’s guidelines were developed following a consultation process that began in November 2022. The initial proposal included different thresholds for ESG and sustainability-related terms, which drew criticism from investor groups. In response to the feedback received, ESMA removed the 50% sustainability-related threshold but retained an 80% minimum proportion of investments to meet the sustainability characteristics for funds using the term “sustainable.” The guidelines also introduced a transition category with an 80% investment threshold, allowing investments in companies that derive some revenue from fossil fuels but meet the criteria of Climate Transition Benchmarks. The guidelines will come into effect three months after their publication on the ESMA website in all official languages of the European Union. These guidelines aim to provide clarity and transparency in the use of ESG and sustainability-related terms in investment fund names, ensuring that investors can make informed decisions and reducing the risk of misleading practices in the market. Resources: https://www.esgtoday.com/eu-issues-new-rules-for-funds-using-esg-or-sustainability-names-to-address-greenwashing-risk/