Aggressive scrutiny towards eco-friendliness promises
In a significant development for sustainable investments, the European Securities and Markets Authority (ESMA) has issued new guidelines regulating the application of ESG (Environmental, Social, and Governance) and sustainability-related terms in fund names. The objective is to curb greenwashing, ensuring that funds' sustainability claims align with their investment objectives.
The newly introduced guidelines specify the timing of compliance—new funds must adhere to the regulation from November 21, 2024, while existing funds have until May 21, 2025, to adjust. To be labeled as sustainable, funds must allocate at least 80% of their investments to meet sustainable investment goals and exclude controversial sectors. Moreover, the guidelines categorize funds according to the ESG or sustainability terms used in their names, defining specific requirements for compliance and threatening non-compliant funds with regulatory investigations.
The implementation of these guidelines resulted in a reshaping of fund nomenclature, with some funds removing ESG terminology and others adopting alternative labels like 'screened' or 'transition'. This overhaul aims to protect investors and boost confidence in the European sustainable investment market by providing clear standards and increased transparency.
By implementing these guidelines, ESMA is reinforcing the integrity of the European sustainable investment market, ensuring that fund names accurately reflect their ESG or sustainability commitments. This move will help mitigate the risk of greenwashing and enhance overall investor protection in Europe.
- As a result of the new guidelines, the finance sector is experiencing a transition in environmental-science-focused funds, as some are changing their names to 'screened' or alternative labels, to align with the clear standards established by ESMA.
- In addition to enhancing transparency, the revised fund nomenclature resulting from the guidelines will bolster the business prospects of European environmental-science funds, as investors will have confidence in their authentic commitment to sustainability.
