On 18 November 2022, the European Securities and Markets Authority (ESMA) published a consultation paper containing draft guidelines on funds’ names using ESG or sustainability-related terms.
Currently, ESMA has provided some principles based guidance on funds’ names with ESG or sustainability related terms in a supervisory briefing on sustainability risks and disclosures in the area of investment management. ESMA is now publishing draft guidelines which note that the name of a fund is an instrument to communicate information about the fund to investors and is also an important marketing tool for the fund. The name of a fund is usually the first fund attribute investors see and, while investors are expected to look beyond the name itself and check in detail the fund’s documentation, the name can have a significant impact on their investment decisions. Investors are allocating an ever-increasing proportion of their portfolios towards ESG strategies in order to use their capital to help sustainable purposes and may reasonably expect funds with these names to invest in companies with policies, practices, or characteristics that are consistent with ESG standards.
When finalised, the guidelines will complement the principle-based guidance on funds’ names in the supervisory briefing, addressing funds’ names by proposing quantitative thresholds’ criteria for the use of ESG- and sustainability- related terminology. ESMA believes that this would further help to prevent potential greenwashing risk in fund names.
When finalised the draft guidelines will apply three months after their publication on ESMA’s website in all EU official languages. A transitional period of 6 months will apply for those funds already existing before the date of publication.
The deadline for comments on the consultation paper is 20 February 2023.