ESMA introduces guidelines requiring sustainable funds to adhere to minimum safeguards
Investor interest in sustainability has led to a surge of funds adopting sustainability-related terms in their names to attract attention, raising concerns about greenwashing.
In response, the European Securities and Markets Authority (ESMA) has introduced guidelines requiring funds using ESG-, transition-, or impact-related terms to meet quantitative thresholds for sustainable investments and adhere to minimum safeguards.
ESMA mandates that Article 8 and 9 funds must invest at least 80% in sustainable assets, with transition funds following Climate Transition Benchmark (CTB) exclusion criteria.
Of the 1,826 funds analyzed, at least 16% of Article 8 funds and 7% of Article 9 funds breach these guidelines, and 15% will need to make adjustments. The estimated cost of compliance across EU funds is expected to be at least €18.3 million.
European Securities and Markets Authority (ESMA) published guidelines for funds’ names. The final report, which was disclosed last May, follows a public consultation conducted in 2022 and subsequent changes made to the draft proposal.
Key points
- ESMA introduced new guidelines for fund names under the UCITS European Directive.
- Article 8 and 9 funds using ESG-related terms must invest at least 80% in sustainable assets and meet EU Paris-aligned Benchmark (PAB) minimum safeguards.
- Transition funds using related terms can follow the Climate Transition Benchmark (CTB) exclusion criteria to avoid penalties.
- Analysis reveals that 16% of Article 8 funds and 7% of Article 9 funds with ESG-related names invest in companies excluded by the PAB.
- At least 15% of Article 8 and 9 funds will need to make changes to comply with the new guidelines.
- 1% of transition-related funds may need to revise either their name or portfolio.
- Compliance costs for these adjustments are estimated between EUR 20,000 and EUR 100,000 per fund, with an overall cost of at least EUR 18.3 million for EU funds.
Annex: list of words
English ESG-, and impact-related words
- Climate / Clim
- Environment
- Environmental
- Environmentally
- ESG
- Green
- Impact
- Impacting
- Impactful
- Sustainability
- Sustainable / Sust
- SRI
- Responsible
- PAB
- Paris-aligned
- Carbon
- Biodiversity
- Clean
- Net-zero
- SDG
English transition-, social-, and governance- related words
- Transition
- Progress/ion
- Transform/ation
- Change
- Adapt/ation
- Improving
- Social
- Governance
- Evolution
Final report
View the Final Report Guidelines on funds’ names using ESG or sustainability-related terms
ESMA Reveals Report
Full report: Part 1 Part 2 Part 3 Part 4
Source: ABN-AMRO, July 17, 2024
