EFAMA response to ESMA Consultation on fund names using ESG terms

On 21 February 2023, the European Fund and Asset Management Association (EFAMA) published its response to the consultation by European Securities and Markets Authority (ESMA) on Guidelines on funds’ names using ESG or sustainability-related terms. (eventid=18186)
EFAMA welcomes ESMA’s consultation paper and supports the overarching goal of promoting transparency and reducing the risk of greenwashing by protecting investors from unsubstantiated or exaggerated sustainability claims.
+ Even though the landscape of emerging sustainable finance is evolving daily, the criteria used by ESMA to assess fund names (including ESG or sustainability-related terms) go beyond the current SFDR requirements. If additional rules and criteria are needed, they should be left to the discretion of the co-legislators and should not be included in the ESMA guidelines.
+ In order to resolve interoperability issues between the guidelines and the SFDR, MiFID/IDD and other regulatory developments, and before the definition of „sustainable investment“ has been clarified, ESMA and the European Commission should work together before proceeding with the guidelines. Alternatively, ESMA should consider revising the guidelines in accordance with alternative proposals.
+ EFAMA considers it more appropriate to require that funds using the term „sustainable“ or another related term reflect sustainability in their investment objectives, rather than setting a threshold.
In order to ensure that ESG-related terms are only used when materially supported by evidence of sustainability characteristics that are deeply represented in the fund’s investment objectives, policy and strategy, EFAMA considers that it may also be beneficial for the guidelines to closely follow ESMA’s supervisory guidelines on sustainability risks and disclosures in asset management.
+ EFAMA would advise making it clear that cash, cash equivalents, and derivatives utilized for hedging or effective portfolio management should not be included in the ratio calculation if thresholds are set at 80%.
Alternately, the threshold should at least be decreased to operate a fund effectively if ESMA wants to incorporate cash and derivatives in the ratio calculation.
+ Although it is unknown what exactly qualifies as sustainable investment under the SFDR, for which we are entirely dependent on the definition and guidelines to be provided by the European Commission, EFAMA doubts the appropriateness of the separate criterion of 50%.
Instead of addressing the present concerns about greenwashing, setting a quantitative barrier without a clear underlying concept and without creating a level playing field across product categories will create investor confusion.