Luxembourg’s fund and asset management association Alfi has told Europe’s financial markets supervisor Esma that its proposed rules on the use of ESG-related names in fund names lack clarity and will render the marketing of these funds more difficult.
Dutch and German industry groups Dufas and BVI have also criticized the Esma proposal, pressing for a more harmonized EU approach that is aligned with upcoming adjustments to the Sustainable Finance Disclosure Regulation, or SFDR.
Alfi agreed that it is “of utmost importance to protect investors against unsubstantiated or exaggerated sustainability claims”, but said that the suggested approach of linking ESG-related names to specific minimum thresholds on the fund’s holdings is “not the most appropriate way” to foster this.
“We are not convinced” that quantitative thresholds governing fund names will foster the regulatory objectives of promoting convergence and transparency or tackling the risk of greenwashing, the association said in a seven-page response to the proposed Esma guidelines posted on its website.
Confusing investors
The association said the proposal fails to address greenwashing nor will it provide more convergence and comparability between funds. It also risks confusing investors. Instead, Alfi said, these issues would be better addressed by considering the fund’s underlying methodologies and investment strategy, in combination with a supervisory focus.
Esma’s consultation on guidelines for the use of ESG-related words in fund names closed last weekend. As the EU’s supervisory authority for investment funds and asset management, Esma has proposed specific criteria for using ESG or sustainability-related terms in fund names and stepped up its approach against greenwashing.
“It is not fully clear to us based on which considerations Esma has chosen the concrete percentages,” said Alfi. “ In addition, we do not believe that a calculation solely on the base of holdings allows for a comprehensive understanding” on the investment process.
“Only focusing on thresholds could eventually also be misleading for the investor,” it said, adding that it is transparency on the investment methodologies applied “that can guide investors in informed decisions and address greenwashing risks.»
Poor timing
The asset management industry takes aim at Esma’s proposed timing for the new guidelines, referring to an upcoming consultation by the European Commission this summer on various aspects of the SFDR.
“Esma has chosen a bad time,” German fund industry association BVI said. “Setting regulatory criteria only for funds would pre-empt the planned open discussion on the SFDR and would be counterproductive in the BVI›s view. Instead, ESMA should bring the findings from the current consultation into the upcoming public debate.”
Unharmonized supervision
“This issue cannot be viewed or solved in isolation,” said Dutch fund association Dufas. “SFDR contains many open issues and points of improvement which are still being evaluated… national competent authorities (NCAs) are already diverging with their supervision of fund names… We encourage Esma to caution NCAs in providing more detailed guidance leading to unharmonized supervision.”
“We believe a more structured approach to reviewing and amending the sustainable finance framework would be beneficial for all stakeholders concerned rather than by way of an ad hoc and piecemeal approach,” Alfi said.