[ESMA22-106-4511 ] SMSG advice to ESMA on ESMA’s consultation on Guidelines on funds’ names using ESG or sustainability-related terms

On 21 February 2023, the Securities and Markets Stakeholder Group (SMSG) published its response to the consultation by European Securities and Markets Authority (ESMA) on Guidelines on funds’ names using ESG or sustainability-related terms (“naming” consultation). (eventid=18186)
– Following the ESAs‘ consultation on greenwashing (eventid=18118), ESMA is consulting on future Guidelines on funds´ names that include ESG or sustainability-related terms. The SMSG concludes that the two consultations are closely connected, despite the fact that their dates and scope differ.
+ As names are an important marketing tool, especially in retail, the name is too often the only reference that is examined or about which information is obtained.
In any event, the SMSG believes that a fund’s name should not be deceptive. There is also space to be clearer in the name – as part of a broader conversation on possibly misleading claims – with the caveat that in reality, a name may generally transmit very little information. Furthermore, as with any other product, names do not have to incorporate words directly related to the fund’s strategy or assets.
– The proposed quantitative threshold approach does not persuade the SMSG, as the concept definitions and supporting data are not yet complete. Adding a second criteria, namely the Sustainable Investment threshold, may be perplexing for investors. This quantitative suggestion may thus fail its purpose at this level of development of the sustainable finance system. As a result, the SMSG believes that a two-stage strategy (qualitative first, quantitative second) may be more suited.
+ Threshold breaches
The SMSG concurs with ESMA that transient passive violations should be remedied for the benefit of unitholders. To eliminate the necessity to specify „technical“ authorized breaches, the threshold calculation should be done on the exposure value of the investment portfolio (i.e., without supplementary liquid assets and EPMs) in a consistent manner with the other fund ratios on, say, diversification or eligibility.
– Exclusions
ESMA suggests that all investments in ESG-named funds be subject to Paris aligned benchmark (PAB) exclusions. The SMSG disagrees here, as not all ESG funds have a PAB aim. Second, omitting the energy sector (without making any distinction between enterprises) corresponds to removing transition funding, which is a key goal of the sustainable finance agenda, as here is where the most significant efforts are required to achieve genuine carbon reduction effect.
+ Indices
The SMSG also raises the possibility of a divergence between fund names and index names within the scope of ESMA’s proposed recommendations. Indices are frequently used as a fund’s investment aim or as a tracking reference (for example, „ESG Global Leaders index“ or „For Good World index“).
– Link to existing strategies and transition investing
The SMSG is disappointed that the consultation paper makes no assessment of existing strategies or links the proposal to existing rule-based efforts included in some national regimes or labels. In its response, the SMSG lists (not exhaustively) existing criteria that can be used to obtain the right to use an ESG term in a company’s name: thematic investing on an ESG theme, engagement strategies, relative rating improvement approach, relative selection approach, and KPI improvement. Ex-ante strategies that constrain portfolio investments on sustainability aspects/factors should be recognized. If „naming“ compliant Art. 8 and 9 funds are no longer permitted to invest in any transition investments in their portfolio, the SMSG wonders what the ultimate environmental impact of the European Sustainable Finance Agenda implementation will be.
SMSG members believe that the proposed approach implicitly relies too heavily on a static view of „green“ or ESG funds.