To make sure investors are not misled, the European Union’s top supervisory authority for investment funds and asset management on Friday proposed its criteria for using ESG or sustainability-related terms in fund names. Esma has also stepped up its approach against greenwashing, opening up a call for evidence.
The European Securities and Markets Authority, known as Esma, said that ESG- and sustainability-related terms in fund names should “be supported in a material way by evidence” of sustainability characteristics that are reflected “fairly and consistently” in the fund’s investment objectives and policies.
“Esma continues to prioritise promoting transparency and tackling the risk of greenwashing as identified in the Esma Strategy and Sustainable Finance Roadmap,” said Esma chair Verena Ross, announcing the consultation. “The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims while providing both (national supervisors) and asset managers with clear and measurable criteria to assess names of funds including ESG or sustainability-related terms.”
Qualitative thresholds defined
The Esma consultation announced on Friday seeks feedback from the industry and other stakeholders on imposing a quantitative threshold of 80 percent for the use of ESG related words; an additional threshold of 50 percent for the use of “sustainable” or any sustainability-related term only, as part of the 80 percent threshold; application of minimum safeguards to all investments for funds using such terms, including exclusion criteria; and additional considerations for specific types of funds, in particular index and impact funds.
The consultation closes on 20 February. The criteria would be applicable from three months after publication on the Esma website, while a transition period of six months is suggested for funds that launched already before the application date.
So far this year, approximately 30 billion euro has flowed into dark-green sustainable investment funds as classified by Article 9 of the EU’s Sustainable Finance Disclosure Regulation, or SFDR. The SFDR however does not define clear criteria for what is ESG and what is not. The EU has left this up to financial supervisors.
Seeking evidence on greenwashing
Earlier this week, Esma, noting growth demand for sustainability-related products, launched a separate call for evidence to gather input from stakeholders on how to understand the key features, drivers and risks associated with greenwashing and to collect examples of potential greenwashing practices.
“The call is also motivated by the need to better understand which areas may become more prone to greenwashing risks,” Esma said in a statement. “In addition, the call seeks input on potential greenwashing practices relevant to various segments of the sustainable investment value chain and of the financial product lifecycle.”
“Obtaining a more granular understanding of greenwashing will help inform policy making and supervision and will help foster the reliability of sustainability-related claims,” Esma said.
‘Broadly used’
While there still is no clear legal definition of greenwashing, Esma said that, in the context of this call, the term “greenwashing” is “broadly used, recognising that sustainability-related claims can be linked to all aspects of the ESG spectrum”.
Esma made clear that all interested parties are welcome to contribute to the survey, including financial institutions under the remit of the three European supervisory authorities and other stakeholders ranging from retail investors and consumers’ associations to NGOs and academia. Contributions should focus on greenwashing risks and occurrences arising in the financial sector and affecting financial products or services, which are under the scope of the ESAs.
Respondents are invited to submit their responses by 10 January 2023. Contributions will feed into the ESAs’ findings for their progress reports due in May 2023, and final reports due in May 2024, the authority said.
Related articles on Investment Officer Luxembourg:
- FCA proposes three ESG labels, sets threshold at 90%
- CSSF tells funds to keep promises on what they sell
- EU Commission won’t assess greenwashing before 2024
- Sustainable finance: Great reclassification is coming