The European Securities and Markets Authority (ESMA) has released its finalized guidelines for using ESG (Environmental, Social, and Governance) and sustainability-related terms in investment fund names. These guidelines include investment thresholds required for sustainable investment funds and the creation of a transition category for investments not yet green but on a positive trajectory toward environmental sustainability.

Addressing Greenwashing Concerns

ESMA's new guidelines respond to a significant increase in investor demand for ESG-focused funds, which has incentivized asset managers to incorporate sustainability-related terms in fund names to attract investors. This trend has raised concerns about greenwashing. ESMA's recent study found a sharp increase in the use of sustainability-related terms in fund names over the past decade, with the proportion of funds using ESG terms increasing more than fourfold. This trend includes new ESG product launches and renaming existing funds to include sustainability-related terms. The study also noted a preference for generic ESG terms, complicating investors' ability to verify alignment with fund names.

Consultation and Initial Proposals

In November 2022, ESMA launched a consultation on the proposed guidance, suggesting an 80% threshold for using ESG-related words and a 50% threshold for terms like "sustainable." It also proposed exclusion criteria based on the EU’s Paris Aligned Benchmarks (PABs), affecting fossil fuel companies and high GHG-emitting electricity producers. However, investor groups criticized the differing thresholds for ESG and sustainability-related terms, arguing it could confuse investors who do not distinguish between them. Feedback also highlighted the need for transition-related terms to support strategies to foster a greener economy.

Finalized Guidelines

ESMA removed the 50% threshold for sustainability-related terms in the finalized guidelines. It retained an 80% minimum investment threshold for funds using the term "sustainable," requiring a meaningful commitment to sustainable investments. ESMA also introduced a transition category with terms like "improving," "progress," "evolution," and "transformation." This category includes an 80% investment threshold and applies exclusions from the EU’s Climate Transition Benchmarks (CTBs), rather than PABs, allowing investment in companies deriving some revenues from fossil fuels.

Implementation

The new guidelines will apply three months after their publication in all EU languages on the ESMA website.

For more details, refer to the [new guidelines on the ESMA website](https://www.esma.europa.eu).