EU Markets Regulator Proposes ESG Labelling Rules for Funds

The European Securities and Markets Authority (ESMA), the EU market regulator, has announced the opening of a consultation on proposed guidelines regarding the use of ESG or sustainability-related terminology in the names of investment funds.

According to a statement accompanying the beginning of the consultation, the initiative aims to shield investors from the risk of greenwashing by ensuring that fund names containing phrases like "ESG" or "sustainability" accurately reflect the funds' actual investing practices and objectives.

ESMA President Verena Ross stated:

"The goal is to protect investors from baseless or overstated sustainability claims while providing NCAs and asset managers with clear and quantitative standards to evaluate fund names that include ESG or sustainability-related terminology."

In the proposals included in the consultation, the minimum proportion of investments required to justify an ESG-related fund name takes centre stage. Certain ideas include an 80% barrier for the use of ESG-related terms, an additional 50% criterion for the use of "sustainable" or another sustainability-related phrase, and guidelines for funds employing exclusion criteria and for specific types of funds such as impact funds.

The consultation comes as regulators worldwide, including the UK's FCA and the US SEC, move to address issues related to the proliferation of investment products and services marketed as 'ESG,' 'green,' or sustainable,' without clear rules communicating to investors the actual ESG-related attributes, methodologies, and criteria being considered in the funds.

The European Securities and Markets Authority (ESMA) issued a sustainable finance roadmap earlier this year, outlining its top action and implementation areas to meet the fast-expanding and evolving sustainable finance industry. Priority areas included addressing the risk of greenwashing, evaluating SFDR disclosure rules, adopting regulations for the design of ESG investment products, and participating in the creation of sustainability reporting standards.

Ross said:

"With this consultation, ESMA continues to prioritize encouraging openness and addressing the risk of greenwashing, as outlined in its Strategy and Sustainable Finance Roadmap.

The consultation will stay available until February 20, 2023, and ESMA intends to finalize the recommendations thereafter.