ESG funds continue to grow in popularity – so it’s no surprise the rules are getting tighter. The new development shows that the European Securities and Markets Authority (ESMA) are keen to fight greenwashing from the outset. As part of the ongoing development surrounding investments funds with a ESG focus, ESMA announced its guidelines for the use of ESG related terms in a fund’s name.
This is not a new concept to many fund managers, as there are restrictions on certain words you can use when registering legal entities with, for example, the FCA in the UK, prevents you from using certain terms unless you submit a sensitive word request to them.
As ESG becomes more accessible for investment funds, and investors increase their ESG focus, it’s become a very popular investment strategy. In a particularly tough fundraising market, fund managers can look to bring in readily available ESG investors, on the notion that the fund will invest in ESG investments. It can be a complex and costly exercise to evidence ESG principles in an investment strategy, and so getting the balance right needs to be a well considered process. As such, fund managers have taken to including ESG words in their fund names (an ESMA study shows a 400% over the last 10 years). Naturally, you can you can expect to see the word “debt” in a debt fund’s name, or equally “real estate” in a real estate fund’s name, ESG funds have taken a similar approach. The nuance here, is that with the rise of ESG, there has also been a rise in greenwashing. As ESG is intrinsically tied to a purpose with a responsibility to others and the environment, the implications of a faux fund title could have more severe ramifications for investors than if a debt fund were to be a misnomer (although the investors would be equally unhappy!).
ESMA have now decided how they will police this topic. There is a requirement for 80% of investments to meet the sustainability characteristics of funds using the term “sustainable,” and introducing a commitment to meaningfully invest in sustainable investments. There is also exclusion criteria for funds based on the EU’s rules for Paris Aligned Benchmarks (PABs), which has a more stringent approach to income and investments in fossil fuel companies and electricity producers with high GHG emissions.
ESMA have also added another category, for transition funds (covering words such as “improving” “progress” “evolution” and “transformation”. This transition category similarly has an 80% threshold, but applies exclusions from the EU’s rules for Climate Transition Benchmarks (CTBs), instead of PABs, in order to enable investment in companies deriving part of their revenues from fossil fuels.
The required threshold to include ESG or transition words in your fund title is something you’ll have to be aware of from day one. Mills & Reeve’s ESG experts or funds team are well placed to help clarify your position – and tell you if you can name your ESG fund an “ESG fund”!
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