European Securities and Markets Authority, the European Union's securities regulator, is seeking input as it works on rules for funds calling themselves sustainable or ESG.
In a consultation paper published Nov. 18, ESMA offered draft guidelines for such funds, saying the names "should be supported in a material way by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund's investment objectives and policy." The proposal said those names "are a powerful marketing tool."
The regulator is particularly focused on whether it makes sense to have quantitative thresholds for the minimum proportion of investments needed to support a fund with ESG or sustainability in its name. A fund with any environmental, social and governance-related words in the name should have at least 80% of its investments meet objectives already set out in EU rules on sustainability-related disclosures in the financial sector, the consultation paper said.
It also proposed an additional threshold of 50% for such funds to just use "sustainable" or any sustainability-related term.
The 80% proposed threshold "is high enough to meet investors' expectations that a large majority of the fund's actual or intended investments is made in assets consistent with its name thus avoiding fund names to be deceptive or misleading," the regulator said in the consultation.
Aimed at protecting investors against unsubstantiated or exaggerated sustainability claims, the new guidelines should also provide asset managers "with clear and measurable criteria to assess names of funds including ESG or sustainability-related terms," ESMA said.
The regulator will take public comment until Feb. 23. The plan is to make the guidelines apply three months after being finalized, with a six-month transition period for funds launched before the application date.
On Nov. 15, ESMA joined other European financial regulators in calling for evidence to help them better understand greenwashing features, drivers and risks, and to identify potential greenwashing practices. The trio known as the European Supervisory Authorities also includes the European Banking Authority in Paris and the European Insurance and Occupational Pensions Authority in Frankfurt.