EU markets regulator the European Securities and Markets Authority (ESMA) announced the launch of a consultation for proposed rules on the use of ESG or sustainability-related terms in the names of investment funds.

According to a statement accompanying the launch of the consultation, the initiative is aimed at protecting investors from greenwashing risk, by ensuring that fund names that include terms such as “ESG” or “sustainability” fairly reflect funds’ actual investment policies and objectives.

ESMA Chair Verena Ross said:

“The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims while providing both NCAs and asset managers with clear and measurable criteria to assess names of funds including ESG or sustainability-related terms.”

Proposals included in the consultation primarily focus on the minimum proportion of investments required to support an ESG-related fund name. Specific proposals include an 80% threshold for the use of ESG-related words, an additional 50% threshold for the use of “sustainable” or any sustainability-related term, as well as rules for funds using exclusion criteria and for specific types of funds such as impact funds.

The consultation comes as regulators globally, including the UK’s FCA and the US’ SEC are moving to address issues associated with the proliferation of investment products and services marketed as ’ESG,’ ‘green’ or ‘sustainable,’ without clear rules communicating to investors the actual ESG-related attributes, methodologies and criteria that are being considered in the funds.

Earlier this year, ESMA released a sustainable finance roadmap, setting out its priority action and implementation areas to address the rapidly emerging and evolving sustainable finance market. Priority areas included addressing the risk of greenwashing, reviewing SFDR disclosure requirements, implementing requirements for the design of ESG investment products, and contributing to the development of sustainability reporting standards.

Ross 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.

ESMA said that the consultation will remain open until February 20, 2023, and that it aims to finalize the guidance afterwards.

Click here to access the consultation.