Fund names in sustainable finance have proven to be a thorny issue. ESG funds names are not always a reliable indicator of the investment strategy. During a consultation on the issue, the European Securities Market Authority (ESMA) found some funds changed their names to imply connections to ESG criteria, without changing their underlying investment strategies. The agency determined that fund name rules were necessary and new guidance to has been published address this issue. According to a press release from the ESMA:
“The Guidelines establish that to be able to use these terms, a minimum threshold of 80% of investments should be used to meet environmental, social characteristics or sustainable investment objectives. The Guidelines also apply exclusion criteria for different terms used in fund names:
– ‘Environmental’, ‘Impact’ and ‘sustainability’-related terms: exclusions according to the rules applicable to Paris-aligned Benchmarks (PAB); and
– ‘Transition’, ‘Social’ and ‘Governance’-related terms: exclusions according to the rules applicable to Climate Transition Benchmarks (CTB).”
The new guidance will take effect in August 2024. Fund names face similar problems globally; in the US, the SEC took action with their own Final Rule on Investment Company Names in September 2023 requiring a similar 80% alignment between investment policy and fund names. Globally, regulators are attempting to eliminate greenwashing from sustainable finance. Public trust in sustainably-aligned funds is critical to financing the climate transition – and misleading fund names have muddied the waters. While the new rules help move sustainable finance forward, those looking to invest sustainably should do their own due diligence into fund investment strategies. Oftentimes, people have different ideas about what is and isn’t sustainable.
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