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EU Finalizes Guidelines to Combat Greenwashing in “ESG” and “Sustainability” Fund Names

EU Finalizes Guidelines to Combat Greenwashing in “ESG” and “Sustainability” Fund Names

EU Finalizes Guidelines to Combat Greenwashing in "ESG" and "Sustainability" Fund Names
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Key Impact Points:

  • New guidelines mandate at least 80% of investments in ESG or sustainability funds must meet specific environmental, social, or governance criteria.
  • Exclusion criteria are specified for various sustainability-related terms to prevent misleading fund names.
  • Guidelines to take effect three months after publication in all EU languages, with a six-month transitional period for existing funds.

EU Watchdog, The European Securities and Markets Authority (ESMA) has finalized guidelines aimed at curbing greenwashing in the investment sector. These new rules are designed to protect investors from misleading claims about the sustainability of funds and provide clear criteria for asset managers.

Why It Matters:

Greenwashing, the practice of making misleading claims about the environmental benefits of a product or service, has been a significant concern in the financial industry. With the rise of ESG (Environmental, Social, Governance) and sustainability-focused investments, ensuring transparency and credibility in fund names is crucial for maintaining investor trust.

Key Details:

  • Investment Thresholds: Funds using ESG or sustainability terms in their names must ensure that at least 80% of their investments align with specific environmental, social characteristics, or sustainable investment objectives.
  • Exclusion Criteria: The guidelines specify exclusion criteria for terms such as “Environmental,” “Impact,” and “Sustainability,” ensuring compliance with rules applicable to Paris-aligned Benchmarks (PAB) and Climate Transition Benchmarks (CTB).
  • Combined Terms and Benchmarks: Additional criteria are outlined for funds using a combination of sustainability-related terms or designating an index as a reference benchmark.

Original Quotes:

  1. ESMA Statement: “The objective of the Guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names.”
  2. Consultation Feedback: “The Final Report containing the guidelines also provides a summary of the responses ESMA received to its consultation paper and an explanation of the approach taken to address the comments received.”

Related Article: EU Commission Takes Action Against 20 Airlines for Misleading Greenwashing Practices

Next Steps:

  • Translation and Publication: The guidelines will be translated into all EU languages and published on ESMA’s website. They will become applicable three months after this publication.
  • Notification Requirement: Within two months of publication, competent authorities must notify ESMA of their compliance status with the guidelines.
  • Transitional Period: Existing funds have a six-month transitional period to comply with the new guidelines, while new funds must adhere immediately upon their creation post-application date.

These guidelines mark a significant step in promoting transparency and accountability within the investment sector, ensuring that ESG and sustainability claims are substantiated and reliable. Investors can now have greater confidence in the integrity of the funds they choose, knowing that stringent criteria are in place to prevent greenwashing.

For more information, visit the ESMA website.

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