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EU Finalizes Guidelines to Combat Greenwashing in “ESG” and “Sustainability” Fund Names

Key Impact Points:

  • According to new regulations, certain environmental, social, or governance standards must be met by at least 80% of investments made in ESG or sustainability funds.
  • To avoid misleading fund names, some sustainability-related phrases have specific exclusion requirements.
  • Guidelines will be implemented six months after they are published in all EU languages, with a grace period of three months for funds that are already in place.

The European Securities and Markets Authority (ESMA), an EU watchdog, has completed rules intended to stop greenwashing in the financial industry. The purpose of these new regulations is to shield investors from deceptive statements on the sustainability of funds and to provide asset managers precise guidelines.

Why It Matters:

Greenwashing, the practice of making misleading claims about the environmental benefits of a product or service, has been a significant concern in the financial industry. With the rise of ESG (Environmental, Social, Governance) and sustainability-focused investments, ensuring transparency and credibility in fund names is crucial for maintaining investor trust.

Key Details:

Investment Thresholds: Funds with sustainability or environmental-related elements in their names are required to make sure that a minimum of 80% of their investments are in line with certain social, environmental, or sustainable investment goals.

Exclusion Criteria: In order to ensure compliance with regulations pertaining to Paris-aligned Benchmarks (PAB) and Climate Transition Benchmarks (CTB), the guidelines provide exclusion criteria for terms such “Environmental,” “Impact,” and “Sustainability.”

Combined conditions and Benchmarks: Extra requirements are included for funds that use an index as a reference benchmark or a combination of conditions linked to sustainability.

Next Steps:

Translation and Publication: The rules will be posted on ESMA’s website after being translated into every language spoken in the EU. They will take effect three months from the date of this publication.

Notification Requirement: Competent authorities should inform ESMA of their compliance status with the recommendations within two months of publication.

Transition time: New funds must instantly comply with the new standards upon formation post-application date, while existing funds have a six-month time to do so.

By guaranteeing that ESG and sustainability claims are validated and trustworthy, these rules represent a major advancement in the promotion of accountability and transparency within the investing industry. With strict measures in place to prevent greenwashing, investors may now feel more confident in the integrity of the funds they select.