ESMA’s new sustainability guidelines for funds

The European Securities and Markets Authority (ESMA) has set a new benchmark to curb the risks associated with greenwashing. ESMA’s recent publication of final guidelines detailing when and how funds can label themselves as sustainable marks a significant step towards ensuring clarity and transparency for investors and asset managers alike.

Key changes in the guidelines

Previously, ESMA proposed a minimum threshold that required funds to invest at least 50% in sustainable assets to use sustainability-related terms in their names. However, this was met with considerable criticism from stakeholders for being too discretionary. In response, ESMA removed this threshold and introduced criteria requiring a commitment to meaningful investment in sustainable assets.

The revised guidelines now mandate an 80% minimum investment in assets that meet environmental and/or social characteristics or align with sustainable investment objectives. This threshold is applied consistently across all terms in the guidelines, reinforcing ESMA’s commitment to robust sustainability claims.

Transition and impact terms

A notable inclusion in the guidelines is the specific criteria for funds using terms related to climate transition and social governance. Such funds must adhere to the Climate Transition Benchmark (CTB) exclusion criteria, which excludes companies involved in controversial weapons, tobacco production, and those violating certain international standards.

Furthermore, funds labelled with ‘impact’ or ‘transition’ must demonstrate a positive, measurable impact on their investment objectives, ensuring that these terms are not merely decorative but reflect genuine contributions to sustainability goals.

Implications for asset managers

For asset managers, these guidelines are more than just regulatory compliance; they are a directive to refine their investment strategies and product offerings. Asset managers must now ensure that the sustainability claims made through fund names are substantiated by actual investment practices that align with the defined criteria.

Given the complexity and nuances of the guidelines, asset managers could benefit from leveraging platforms like SI Engage. This tool can streamline the management and reporting of ESG and non-ESG engagement data, enabling asset managers to maintain transparency and accuracy in how sustainability efforts are represented and executed.

Industry reactions and future outlook

The response from the industry has been mixed. While some praise the move towards greater transparency, others argue that the guidelines could have been more stringent, suggesting a threshold of 90% to align all investments with fund objectives better, excluding only cash and instruments held for liquidity purposes.

On the other hand, Bhavik Parekh from MainStreet Partners highlights disappointment in the removal of the 50% sustainability threshold, fearing that the new criteria of ‘meaningful investment’ may be too vague and open to interpretation, potentially lowering the bar for sustainability claims.

ESMA’s final guidelines are a crucial step in the right direction, aimed at protecting investors from unsubstantiated sustainability claims and supporting asset managers in aligning their product offerings with genuine sustainability objectives. As the industry adapts to these guidelines, tools like SI Engage will be instrumental in helping asset managers navigate these changes effectively, ensuring that they not only comply with new regulations but also excel in delivering genuine sustainable investment opportunities.

As the landscape of ESG investing continues to evolve, staying informed and adaptable will be key for asset managers aiming to lead in the competitive market of sustainable investments. Be sure to find the latest sustainable investing news on our blog.

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