The European Fund and Asset Management Association has criticised the European Securities and Markets Authority's latest guidelines for ESG fund names.

Under ESMA's proposed regulations, for a fund to use "any ESG-related words" in its name, at least 80% of its holdings must be "used to meet the environmental or social characteristics or sustainable investment objectives". 

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While EFAMA has shared its support for "setting common rules", its feedback to the watchdog urges that ESMA "delays [its] proposed guidelines until the lack of clarity on what constitutes a 'sustainable investment' is rectified". 

ESMA's Consultation on Guidelines on funds' names using ESG or sustainability-related terms gave market participants two months to respond to the proposals, for which the deadline for submission was 20 February 2023. 

A more lenient scenario is proposed for fund names containing only "sustainable" and direct variants - between 50% and 80% of holdings must be allocated to assets that meet sustainable investment objectives - according to the fund's investment strategy disclosed as part of SFDR Delegated Regulation.

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

"Rather than imposing a threshold, it would be more proportionate to mirror ESMA's supervisory guidance on sustainability risks and disclosures by ensuring that 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."

The latest efforts from ESMA to erect guardrails around sustainable fund terminology have unfolded concurrently with those from the Financial Conduct Authority, from which the equivalent domestic consultation closed less than a month ago. While both reforms attract personalised criticism, one commonality is a concern for misalignments with other ESG policy efforts at home and abroad.

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EFAMA wants to see ESMA working "together with the European Commission to resolve interoperability issues between the guidelines and SFDR, MiFID/IDD etc.", echoing the UK Investment Association's insistence for the FCA's SDR to include "recognition of [the] importance of cross-border distribution" and "the importance of ensuring the UK's regime is as compatible with other initiatives".

In its complete response to the FCA's proposals this January, the IA cited a collaboration already underway between the two fund associations, which takes matters into their own hands: "The IA along with the pan EU trade body, EFAMA, are working towards ensuring minimum standards under the SFDR so consumers can have confidence that the funds in which they are invested support their own sustainable interests and objectives."

Sian Barnett Wike is deputy editor of Sustainable Investment