Khanchit Khirisutchalual

As part of their growing fight against greenwashing, European regulators launched a consultation on investment funds’ use of “green” terminology in their names.

The European Securities and Markets Authority (ESMA) published a consultation paper that seeks feedback on draft guidance for naming funds with ESG and other sustainability-related words.

“Funds’ names are a powerful marketing tool,” the regulator said in a release accompanying the paper, which outlines its efforts to ensure that these names don’t deceive investors.

“In order not to mislead investors, ESMA believes 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,” it said.

To that end, the regulator is proposing to set minimum thresholds on portfolio holdings for funds that use certain green terminology. For instance, at least 80% of a fund’s portfolio would have to be composed of investments that aim to meet environmental or social objectives in order to use ESG-related words in its name.

And to use sustainability-related words, at least 50% of the portfolio would have to be specifically in sustainable investments, alongside the 80% requirement.

Additionally, the regulator is seeking feedback on whether “minimum safeguards” should apply to the portion of the portfolio that doesn’t meet the ESG requirements — such as setting exclusion criteria that would apply to the rest of the portfolio. It also seeks input on considerations for specific types of funds, such as index and impact funds.

“With this consultation, ESMA continues to prioritize promoting transparency and tackling the risk of greenwashing,” said Verena Ross, chair of ESMA, in a release.

“The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims while providing both [regulators] and asset managers with clear and measurable criteria to assess names of funds including ESG or sustainability-related terms,” she added.

The deadline for responding to the consultation is Feb. 20, 2023.