Concluding the public consultation process that began in November 2022, the European Securities and Markets Authority (ESMA) published its guidelines on ESG fund naming rules that will become effective across the EU in November 21, 2024.
The regulator, referred to as ESMA, has said it's implementing the guidelines to protect investors from greenwashing and unsupported sustainability claims.
ESMA further states that “Guidelines aim to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names”.
Fund managers have been caught overstating the benefits of their ESG funds, evidenced by multiple fines by U.S. and EU regulators. In the U.S. in 2023, Goldman Sachs Group Inc. and BNY Mellon were fined $4 million and $1.5, respectively.
ESMA staff have identified 6,490 funds with ESG- or impact-related terms in their name (9.6% of the total). These include 1,702 AIFs (4.5% of AIFs) and 4,788 UCITS funds (16% of UCITS).
EU fund managers must now comply with these requirements.
For new funds, the Guidelines will apply from 21 November 2024.
For existing funds, the Guidelines will apply from 21 May 2025.
ESG Criteria
Funds with the term ESG in their name must have at least 80% of investments tied to environmental or social characteristics.
Sustainability Criteria
Funds with the term sustainable or any other term derived from this word in their name fund managers must allocate at least 80% of investments tied to sustainability criteria.
Paris Agreement Alignment
Funds using the terms such as environmental, impact, and sustainability, must follow the Paris Agreement Benchmark (PAB), i.e. to exclude, apart from the three categories mentioned by the CTB, the following four categories of companies based on GHG emissions companies whose source of revenue is:
Greater than 1% derived from either exploration, mining, extraction, distribution or refining of hard coal and lignite.
Greater than 10% from oil fuels.
Greater than 50% from gaseous fuels.
Greater than 50% from electricity generation with a GHG intensity greater than 100 gCO2/KWh.
Minimum Safeguards
Funds using sustainability-related terms should, in addition, commit to invest meaningfully in sustainable investments as laid out in Article 2(17) of the SFDR. However, for the time being, ESMA does not provided a precise definition of the term “meaningfully”. (Kepler Cheuvreux, Josep Pujal).
Impact
Morningstar reported that more 1600 funds breached the ESMA rules that when complied with would result in $40 billion in sales, 45% of which is owned by passive funds.
Summary Table
Source: JD Supra.
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