European regulator ESMA announces open hearing on its consultation on ESG terms in fund names

The European Securities and Markets Authority ('ESMA'), the EU's financial markets regulator, will be holding an open hearing on 23 January 2023 regarding its  consultation on guidelines on the use of ESG- or sustainability-related terms in fund names; an initiative launched in late 2022.

This is part of an effort by ESMA to tackle potential greenwashing (see our related article here) and prevent investors from being misled. As fund names are powerful marketing tools, any ESG-related naming should be supported by material evidence of sustainability characteristics or objectives, reflected fairly and consistently in the fund's investment objectives and policy.

Stakeholders can register for the open hearing by 19 January 2023. This is part of ESMA's attempt to seek stakeholder feedback on the following elements of the consultation paper, amongst others, by 20 February 2023: 

• The introduction of a quantitative threshold, ie if a fund uses ESG-related words in its name, then 80% of the fund's investments must meet the E/S characteristics or sustainable investment objective as defined in the Sustainable Finance Disclosures Regulation ('SFDR').
• An additional threshold where a fund uses the word 'sustainable' or any sustainability-related term, whereby 50% of the above 80% (ie 40% of the total) investments need to be sustainable as defined in the SFDR.
• For funds using the word 'impact', an additional requirement that their investments are made 'with the intention to generate positive, measurable social or environmental impact alongside a financial return'. 

ESMA envisages that the draft guidelines will become applicable from 3 months after the publication of their translation on the ESMA website. For funds launched prior to this date, ESMA proposes a transitional period of 6 months.

Implications for funds

The ESMA consultation provides funds which will be impacted with an opportunity to influence and contribute to the proposed regulation. Given the growing prominence of ESG labelled funds, careful attention should be paid to ensure that the funds which are marketed as being ESG or sustainability focused meet the necessary standards. 

The Sustainable Business team at Withers LLP can assist with making submission to ESMA to help shape the proposed regulation and to advise on preparing for the anticipated regulatory change. For questions, contact Robert Kovacs and Tessa Schrempf.