The European Securities and Markets Authority (ESMA) has updated its proposed rules for fund names using “ESG” or “sustainability” terms. The move is a response to the rising risk of greenwashing, as revealed by a recent study showing a fourfold increase in the use of sustainability-related terms in European fund names over the past decade. To address this, ESMA introduces a new “transition” category, allowing labels for funds focused on transition strategies.

ESMA’s initial proposal included separate thresholds for ESG and sustainability terms, drawing criticism for potential investor confusion. Following consultation, ESMA removed the 50% sustainability-related threshold, emphasizing an 80% minimum investment proportion for sustainability characteristics. The regulator also introduced Paris-aligned benchmark exclusions and criteria for meaningful investment in sustainable options.

ESMA acknowledged concerns about fossil fuel exclusions limiting funds with “social” or “governance” terms. Consequently, a new category for “transition” terms was introduced, retaining the 80% investment threshold and applying Climate Transition Benchmark exclusions.

ESMA underscores the importance of fund names accurately reflecting sustainability characteristics and objectives, aiming to curb misleading practices in the financial market. The guidelines are set to be adopted after the review of AIFMD and UCITS Directive, with a three-month grace period before official application.

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