The European Securities and Markets Authority has launched a consultation on the use of ESG and sustainability-related terms in fund names, in a bid to tackle greenwashing and protect investors.
The EU's financial markets regulator is seeking stakeholder feedback by February next year on the introduction of quantitative thresholds for the minimum proportion of investments needed to support the ESG or sustainability credentials in funds' names.
The proposals include a quantitative threshold (80%) for the use of ESG related words and an additional threshold (50%) for the use of "sustainable" or any sustainability-related term only, as part of the 80% threshold.
It also includes the application of minimum safeguards to all investments for funds using such terms and additional considerations for specific types of funds, such as index and impact funds.
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ESMA said that funds' names are a powerful "marketing tool" and that in order not to mislead investors, it believes ESG and sustainability-related terms in funds' names should be backed up by evidence.
Funds must be able to prove that the sustainability characteristics or objectives of the fund are reflected fairly and consistently in the fund's investment objectives and policy, the regulator said.
Verena Ross, ESMA chair, said: "With this consultation, ESMA continues to prioritise promoting transparency and tackling the risk of greenwashing as identified in the ESMA Strategy and Sustainable Finance Roadmap.
"This consultation seeks the views of stakeholders on a proposal to promote supervisory convergence in the assessment by NCAs of the use of ESG or sustainability-related terms in funds' names."
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The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims, Ross noted, while providing both NCAs and asset managers with "clear and measurable criteria" to assess names of funds including ESG or sustainability-related terms.
This comes after the three European Supervisory Authorities, EBA, EIOPA and ESMA - ESAs, published a call last week (15 November) for evidence on greenwashing to gather input from stakeholders on how to understand the key features, drivers and risks associated with greenwashing.
