Greenwashing and isolated green warning sign against white background stock illustration

New guidance from the European Securities and Markets Authority (ESMA) sets out the regulators’ expectations for fund managers when using ESG or sustainability-related terms in funds’ names.

Following a consultation carried out last year, ESMA published a final report setting out guidance that aims to protect investors from being misled by fund names that make exaggerated sustainability claims.

“Competitive market pressures create incentives for asset managers to include terminology in their funds’ names designed to attract investor assets. This increasing demand has led to concerns,” the report said. “This is particularly relevant if funds are named as green or socially sustainable, when sufficient sustainability standards commensurate with that name have not been met.”

In addition to protecting investors from potential greenwashing, the guidance is also intended to provide asset managers with clear, measurable criteria to assess the use of sustainability-related terms in their funds’ names.

Among other things, the guidance requires that at least 80% of portfolio holdings are used to meet ESG or sustainable investment objectives. It also establishes exclusion criteria for certain terms.

The guidance will take effect three months after it is translated and formally published on ESMA’s website. Existing funds will then have six months to comply with the new guidance, while new funds must comply immediately.

In March, the Canadian Securities Administrators (CSA) published their revised guidance for investment funds on ESG disclosure issues, including provisions regarding fund names, which also aimed to guard against greenwashing by investment funds.