The ESG investing situation in the US may be sub-optimal, as discussed in today’s first blog, but the EU is a different story. EU market authorities have been fine-tuning their ESG investing regulations for years. Recently, the European Securities and Markets Authority (ESMA) published a thematic note on reducing greenwashing risks in sustainable investments. The note draws a distinction between “ESG integration” strategies and “ESG Exclusion strategies.” While the former considers ESG risks and opportunities in investment decisions, the latter is aimed at excluding investments from a portfolio based on ESG risks or values. The ESMA provides tips for both strategies, but gives the following guidance for integration-based approaches:
• “When using the term “ESG integration”, do make clear what is meant by it the first time it is used in the communication. Use plain language to accurately describe how ESG factors are considered in the portfolio construction process and try to use illustrative examples to clarify abstract terms.
• Be clear about: i) whether ESG integration is a binding or non-binding aspect of the product’s approach, ii) whether ESG factors trigger portfolio decisions and if so, if they play a key role in the portfolio construction process or not, iii) the extent to which they are used in the financial analysis of holdings, iv) their impact on portfolio composition.
• Clarify at which level ESG integration is done (e.g. at the level of security selection, security weighing, asset allocation).
• Be transparent about any differences in the level of ambition with which ESG integration is done for various asset classes, sectors, etc. and at each step of the process.
• Be clear about whether the strategy adopts a single or a double materiality approach. Moreover, clarify whether this entails the sole consideration of risks (or also of opportunities)”
While this guidance is certainly important for EU market participants, it also provides great tips here for anyone advertising ESG investments in any jurisdiction. ESG investing is complex, so clear communication on strategy is vital for giving investors non-misleading information.
Our members can learn more about sustainable finance here.
Members also save hours of research and reading time each week by using our filtered and curated library of ESG/sustainability resources covering over 100 sustainability subject areas – updated daily with practical and credible information compiled without the use of AI.
If you’re not already a member, sign up now and take advantage of our no-risk “100-Day Promise” – during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. But it will probably pay for itself before then.
Practical Guidance for Companies, Curated for Clarity.
