Industry Updates

ESMA ESG naming rules will not tackle greenwashing, EFAMA warns

Lack of clarity and poor data risk undermining the proposals

Theo Andrew

a sunset behind windmills

The European Fund and Asset Management Association (EFAMA) has criticised the European Securities and Markets Authority’s (ESMA) proposed rules on how asset managers label their ESG-related funds by warning they will not tackle greenwashing issues.

Responding to the European regulator’s consultation, EFAMA said it has concerns about the “numerical threshold” approach taken by ESMA, noting the “lack of clarity” around current sustainable finance definitions.

Under ESMA’s proposals, funds labelled ESG would have a sustainable investment threshold of 80% while funds labelled sustainable should have at least 50% invested sustainably.

“It is unlikely that a methodology built on an unclear legal definition will increase investor understanding of ESG funds and adequately address greenwashing concerns,” Anyve Arakelijan, regulatory policy advisor at EFAMA, said.

“Rather than imposing a threshold, it would be more proportionate to mirror ESMA’s supervisory guidance on sustainability risks and disclosures by ensuring that the use of ESG-related terms is supported in a material way with sufficient evidence of sustainability characteristics in the fund’s investment objectives and strategy.”

EFAMA said the regulator should delay implementing the proposals until the guidelines are clear.

ESMA’s advisory board, the Securities Market and Stakeholder Group (SMSG), echoed EFAMA in its response to the consultation, stating the current thresholds “risk making very little progress on greenwashing”.

“The SMSG is not convinced by the proposed quantitative threshold approach. Definitions of concepts, as well as underlying data, are not yet finalised,” the group said.

“It may be confusing for investors to add a second threshold, i.e., the sustainable investment threshold. This quantitative proposal may thus miss its goal at this stage of development of the sustainable finance framework.”

It added retail investors would likely be confused by the two ESG and sustainability-related thresholds.

SMSG said more clarity was needed on how the proposed thresholds would impact ESMA’s current work on Article 8 and Article 9 minimum investment criteria under the Sustainable Finance and Disclosure Regulation (SFDR).

Currently, there are no minimum investment criteria for Article 8 while Article 9 funds have 100% minimum investment criteria.

The new rules are set to majorly impact how funds are classified under SFDR, with funds likely to have to change their name or enhance their strategy in a bid to meet the new requirements.

Analysis by Morningstar on ESMA’s proposals found that just 18% of ‘light green’ Article 8 funds would be eligible to use the word “sustainable” in their fund name. This rises to 80% for ‘dark green’ Article 9 funds.

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