In the past several years, the EU spent a considerable amount of time and effort regulating sustainable finance. From the EU taxonomy to the SFDR, EU regulators have attempted to strengthen investor confidence in sustainable funds. Improperly named funds are a problem in sustainable finance. Retail investors often make assumptions based on fund names, and those assumptions aren’t always accurate. That’s why multiple jurisdictions, including the EU, adopted fund name rules and guidance. These rules clarify the sustainability obligations that come with sustainability-based names. New research from the European Securities and Markets Authority (ESMA) indicates that the fund name guidance issued in 2024 is working:
“The study found that ESMA’s Guidelines have:
- Improved consistency in the use of ESG terms by increasing alignment of fund names and their actual investment strategies.
- Enhanced investor protection by reducing greenwashing risks.
Drawing on nearly 1,000 shareholder notifications in reaction to the guidelines from the 25 largest EU asset managers with EUR 7.5 trillion in assets under management, the study found that:
- 64% of the funds mentioned in shareholder notifications changed their name, in most cases to avoid the use of ESG related terminology.
- 56% updated their investment policies to strengthen their sustainability focus.
The study then focuses on the impact of the fossil-fuel related exclusions on 4,000 EU funds using ESG terminology in their names, with EUR 2 trillion in assets under management. The analysis shows that:
- Funds with higher fossil fuel exposures were more likely to remove ESG terms from their names, underscoring how portfolio composition influences compliance choices.
- Since the publication of the guidelines, funds retaining ESG terms in their names have reduced their portfolio share of fossil fuel holdings more than all other funds, suggesting efforts to green their portfolios.”
While the ESMA’s guidelines have led to many funds renaming rather than changing their investment practices, these results still mark a win for the agency. The exodus of ESG funds helped separate the wheat from the chaff, giving investors greater confidence.
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