The European Securities and Markets Authority (Esma) has published its final report containing guidelines to mitigate greenwashing risks by setting standards for fund managers promoting Ucits and alternate investment funds, including European long term investment funds and money market funds.
This publication followed a consultation period from November 2022 to February 2023. The consultation led to revisions, notably the removal of the initially proposed 50% sustainability-related investment threshold. Instead, the final guidelines mandate an 80% minimum investment proportion to support the sustainability characteristics of funds using the term “sustainable.” This change addresses stakeholder criticisms that the 50% threshold was “too discretionary” for fund managers.
Esma’s guidelines introduce a transition category to accommodate investment strategies fostering a greener economy. Terms like “improving,” “progress,” and “evolution” signify a commitment to sustainability efforts. Investments in this category must also meet the 80% threshold, aligning with sustainability goals while allowing flexibility for companies transitioning towards greener practices.
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The guidelines apply exclusion criteria for certain terms in fund names. Funds using environmental-, impact-, and sustainability-related terms must comply with exclusions applicable to Paris-aligned Benchmarks. In contrast, transition-, social-, and governance-related terms must adhere to Climate Transition Benchmarks (CTB) exclusions.
Esma also emphasised that a fund’s name is a critical “marketing tool”, significantly influencing investor decisions – often shaping the initial perception of investors. The guidelines also require funds using sustainability-related terms to invest meaningfully in sustainable investments as defined by the EU’s Sustainable Finance Disclosure Regulation.
The next steps involve translating the guidelines into all EU languages and publishing them on ESMA’s website. They will take effect three months after publication. New funds must comply immediately while existing funds have a six-month transition period, stated the report.
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Welcoming the move, Tom Willman, regulatory lead at tech-focused sustainability platform Clarity AI, commented: “While much of the commentary has focused on meeting the 80% threshold of assets to achieve sustainability characteristics or a sustainable investment objective, applying the exclusions from the Paris Aligned Benchmark (PAB) regulation may be a tough task for much of the industry. Funds will need to collect data to ensure that they are not exposed to any assets involved in tobacco, controversial weapons, or breaches of global norms, and that fossil fuel related activities are limited and below a certain threshold.”
A spokesperson for the German Investment Funds Association BVI commented: “The guidelines are an important step away from national specifications towards EU-wide standardisation of the minimum requirements of minimum requirements for sustainable funds. The existing national regulations have led to the fragmentation of the product range.” However, the spokesperson added, some criteria leave room for interpretation, such as the requirement that funds with sustainability-related names should invest ‘to a significant extent in sustainable investments.‘ According to them: “To avoid national deviations, it is important that the application of such criteria continues to be coordinated within Esma and that a uniform understanding of the guidelines is ensured.”
Niels Fibæk-Jensen, co-founder and CEO of Matter, a sustainability data and analytics solutions provider, added: “Investors need to be able to interact directly with the data, to be able to screen for specific things to be more accurate in their assessments of how an asset fits into a wider ESG investing strategy. This is why we are seeing a push from sophisticated investors towards a lot more granular data than traditional, broad rating and scoring solutions.”
Neill Blanks, director of research at pan-European ESG research and an analytics firm, MainStreet Partners, said: “The requirements for aligning the fund to the necessary PAB or CTB in terms of exclusionary criteria, though more restrictive, will likely have some positive effect. Similarly, clarification around “transition” related terms is helpful.”
Blanks expressed “disappointment” with the removal of the requirement to have a minimum of 50% in sustainable investments for a strategy with sustainability-related terms in the name. Additionally, asking asset managers to instead ensure they “invest meaningfully” is open to interpretation.
“Too often have we seen funds classified as Article 8 under the SFDR with the term “sustainable” in the name commit to a minimum of only 10% or 20% in sustainable investments, a bar we consider far too low. The quantitative threshold of 80% for E and/or S characteristics or the sustainable investment objective may help to solve some of the issues around poor commitment we see in the market currently.”
