Industry Updates

ESMA abandons 50% threshold for ‘sustainable’ funds in naming guidance update

Asset managers had previously criticised the proposed rules

Theo Andrew

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The European and Sustainable Markets Authority (ESMA) has abandoned its threshold of 50% for funds using sustainability-related words in funds names.

In an update to its draft guidelines, the European Union’s financial watchdog said it no longer considered the threshold should be retained following the launch of a consultation in November last year.

Under the original proposals, issuers using sustainability-related terms would have been required to invest half of their assets in sustainable investments under the Sustainable Finance Disclosure Regulation (SFDR).

However, Europe’s largest asset managers raised serious concerns over the proposed rules in March, suggesting they could “amplify the potential greenwashing risk”.

Instead, the watchdog said funds using sustainability terms should use the 80% threshold, bringing it in line with the proposed requirement for ESG fund names.

Funds using “sustainable” in their names should also apply the Paris-Aligned Benchmark (PAB) exclusions, as well as “invest meaningfully in sustainable investments defined under Article 2 of SFDR.

ESMA also said it will look into introducing a new category for transition-related terms.

In addition to an 80% threshold, Climate Transition Benchmarks (CTB) exclusions should also be applied, ESMA said.

“This amendment is designed to not penalise funds with those terms in their names that pursue strategies fostering a path to transition towards a greener economy,” ESMA said.

As well as introducing the new thresholds, ESMA also revealed it would delay the implementation of the guidelines to ensure the Alternative Investment Fund Managers Directive (AIFMD) and UCITS directive reviews have been fully considered.

Publication of the guidelines is expected in Q2 2024 subject to the AIFMD and UCITS reviews and are expected to take effect here months later.

Issuers with new ETFs would be expected to comply with the guidelines at the date of application while asset managers with existing ETFs should comply with those funds six months later.

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