ESMA Sets Rules for ESG & Sustainability Claims in Fund Names

The European Securities and Markets Authority (ESMA) has issued new guidelines aimed at cracking down on misleading environmental, social and governance (ESG) claims used in the naming and marketing of investment funds.

Under the guidelines published Thursday, asset managers will face strict criteria to substantiate the use of ESG or sustainability-related terms like "environmental", "impact", "transition" or "ESG" in a fund's name. The rules are intended to protect investors from exaggerated green claims.

A key provision requires that at least 80% of a fund's investments meet specified environmental or social characteristics, or have sustainable investment objectives, in order to use such terminology in the fund's name.

The guidelines also establish minimum exclusion criteria tied to the investment activities deemed acceptable to be labeled with common ESG terms. For example, funds using "environmental", "impact" or "sustainability" in their names must exclude companies involved in controversial weapons or violators of certain environmental standards.

For funds combining multiple ESG terms or using an index as a benchmark, ESMA has outlined additional naming criteria based on the specific claims made.

"By establishing measurable criteria and exclusions, these guidelines set a high bar for funds to properly substantiate any ESG or sustainability-related terms used prominently in marketing their investment strategies," said Natasha Cazenave, Executive Director of ESMA.

The finalized guidelines follow ESMA's prior warning about a proliferation of investment products falsely marketed as sustainable. They come amid growing scrutiny globally of greenwashing claims made by financial firms.

ESMA said the new fund naming requirements will apply 3 months after being translated into all EU languages. Existing funds will have 6 additional months to comply, while any new funds launched must follow the rules immediately.

National regulators across the EU now have 2 months to indicate whether they intend to comply with the ESMA guidelines.

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