Against Greenwashing

This move is a response to the growing interest and demand from investors for funds that integrate ESG factors into their investment strategies. As the use of ESG and sustainability terminology in fund names has surged, so too has the risk of misleading disclosures, often referred to as greenwashing. Greenwashing occurs when a fund portrays itself as more sustainable or responsible than it actually is, which can mislead investors and undermine the credibility of the entire ESG investment sector. To address these concerns, ESMA’s guidelines aim to enhance transparency, prevent greenwashing, and build trust in sustainable investing. The guidelines identify several key terms that are commonly used in fund names, including environmental, social, and governance-related terms that suggest the promotion of ESG characteristics. Other key terms include sustainability-related phrases, as well as transition and impact-related terminology. For example, terms derived from words like “transition,” “improve,” “progress,” “evolution,” and “net-zero” are scrutinized to ensure they reflect genuine investment strategies rather than marketing tactics.

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Clear Criteria for Sustainability

One of the core requirements introduced by these guidelines is that funds using any of the aforementioned key terms must ensure that at least 80% of their investments are directed toward meeting environmental and social characteristics or sustainable objectives. This threshold ensures that the majority of a fund's portfolio is aligned with its stated ESG or sustainability goals, offering investors greater confidence that their investments are making a positive impact. In addition to the threshold requirements, the guidelines also introduce strict exclusion criteria. Funds that use ESG, sustainability, or impact-related terms must exclude investments in companies involved in controversial activities such as weapons production, tobacco cultivation, or those that violate international principles like the United Nations Global Compact. Furthermore, these funds must avoid investments in companies with significant revenue derived from fossil fuels, particularly those involved in the exploration, extraction, and distribution of coal, oil, and gas. By enforcing these exclusions, the guidelines aim to ensure that funds labelled as sustainable are not supporting industries that are contrary to the principles of sustainability.The guidelines apply to specific types of funds. Indeed, those using sustainability-related terms must commit to making substantial investments in activities that align with the Sustainable Finance Disclosure Regulation (SFDR). Funds that use transition or impact-related terms have to demonstrate a clear, measurable path toward achieving social or environmental transitions or generating a positive impact alongside financial returns.

 

Transitional period for existing funds

These guidelines will take effect three months after publication, i.e. on 21 November 2024. New funds must comply immediately, while existing funds have a transitional period of six months, until 21 May 2025. This timeline allows fund managers to adapt their portfolios and ensure compliance, marking a significant step towards greater accountability and integrity in the ESG investment space.

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