Several financial supervision authorities (in Particular in USA, EU, Germany) have launched works to restrict use of the “ESG” and “sustainability” terms in companies’ names. These terms are an effective marketing tool to attract potential customers. Unfortunately, a “catchy” name often leads to greenwashing if it is not reflected in the real characteristics of the offered products.
EU’s works on restricting use of these terms are led by European Securities and Market Authority (ESMA). ESMA identified that there were 29,701 funds domiciled in the EU, out of which 4,192 used ESG/sustainability-related words in their names. However, a list of such “related” words has not been published and is not planned to be officially available[1].
ESMA published a consultation paper to introduce guidelines on funds’ names[2]. The baseline for identifying entities which will be limited in their ability to refer to terms related to “ESG” and “sustainability” in their names, was the SFDR Regulation[3]. Under thereof, financial market participants (e.g., insurance companies, investment firms which provide portfolio management, pension funds) are obliged to disclose on their websites, in information prospectuses and in documentation presented to their investors and customers, information on their engagement in sustainability issues.
The proposed solution is to introduce two thresholds. The first one concerns using any ESG- or impact-related words. It was proposed that a fund which wants to have a name using such expression in its name has to allocate minimum 80% of its investments in products that meet the environmental or social characteristics or sustainable investment objectives. The second threshold – allowing to use a “sustainable-related word in the name” – will be met if within the above first threshold, at least 50 % of investment is allocated in sustainable investments.
ESMA provided a few examples to understand the above rules. If the fund’s name is “Climate Change Solutions Fund”, it should be classified as a name which relates to the “ESG” threshold only. Thus, if the fund commits to making at least 90% of its investments to attain the characteristic promoted by the financial product, it will be in compliance with the proposed guidelines. The other example given is “Sustainable Society Fund” which commits to allocate 80% in investments aligned with “social” characteristics (classified as falling within the ESG threshold) and only 20% in sustainable investments. ESMA stresses that the use of “Society” in the fund’s name will be in line with the guidelines, but the fund will not be in compliance with the guidelines if it keeps a reference to “sustainable” in its name (as it doesn’t meet the 50% threshold).
ESMA will be gathering comments on the proposed guidelines until 20 February 2023. Once the consultations are over, it is planned that the final draft of the guidelines will be translated, published, and become effective within 3 months of publication. The affected entities will have 6 months to adapt their investment portfolio to ensure they meet the required thresholds to keep or change their name. These proposed timeframes are also subject to public consultation.
[1] During the public consultation meeting that took place on 23 January 2023, ESMA’s representatives also confirmed that they do not intend to publish a closed list of such expressions as it could lead to circumventing the assumption behind the regulation. [2] https://www.esma.europa.eu/sites/default/files/library/esma34-472-373_guidelines_on_funds_names.pdf [3] Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures