[Ed. note: No blogs will be published Monday in observance of Indigenous Peoples’ Day. Blogs will start up again Tuesday.]
It isn’t often that the US gets the jump on the EU when it comes to sustainability regulations, but the SEC’s newly amended fund Names Rule may do just that. The EU has been considering the issue of ESG terms in fund names for some time now – the European Securities and Markets Authority (ESMA) published a Consultation on Guidelines on funds’ names using ESG or sustainability-related terms in November 2022. The ESMA has now published a new risk analysis on ESG names and claims in the EU fund industry. The report outlines the need for further regulation in this area as ESG terminology becomes more popular in fund names:
“If reflecting a legitimate sustainability claim, an ESG-related fund name can be a useful first selection indicator for investors trying to navigate within the diverse market of more than 36,000 UCITS investment funds on offer in Europe. If, however, a fund name falsely suggests that the fund has a material ESG dimension, then investors would be deceived at an early and decisive point of the investment decision process.”
The report goes on to discuss how many funds have changed their names in recent years to be more ESG-aligned. However, these funds have not necessarily changed their business practices to reflect the new names. Currently, there is no agreed-upon definition of what constitutes an “ESG-fund” which can be confusing for investors and financial service firms. Based on the ESMA’s interest in ESG terms in fund names, we will probably see a new directive aimed at remedying this issue soon – especially since the SEC already blazed a trail for it.
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