Date: 23rd February 2023

ESMA’s Guidelines on funds’ names using ESG or sustainability-related terms in their names propose the use of quantitative thresholds whereby “if an investment fund has any ESG-, or impact-related words in its name, a minimum proportion of 80% of its investments should be used to meet the environmental or social characteristics or sustainable investment objectives…” and “if an investment fund has the word “sustainable” or any other term derived from the word “sustainable” it should allocate within the 80% of investments at least 50% to sustainable investments”.

BETTER FINANCE is of the view that a fund’s name is often the first, and too often the only, piece of information retail investors see. Since this can have a significant impact on their investment decisions, BETTER FINANCE agrees with ESMA that names can be misleading if those funds do not invest in line with what their names would suggest. While BETTER FINANCE agrees that thresholds are necessary to avoid greenwashing, more clarity is needed on the 80% and 50% allocation thresholds.

Additionally, the current proposal only deems negative screening (exclusion) approaches as appropriate, but BETTER FINANCE believes that such minimum safeguards should be extended to include other investment approaches like engagement for example. In particular, aligning all ESG funds to these exclusions only safeguards will exclude the energy sector, which is one of the sectors in need of transition. Investments for the purpose of transition can positively impact the environment, provided companies are engaged ones, i.e. that they are accompanied by active share ownership and engagement aiming in particular at increasing the focus of the corporate investment plans and business model towards a low carbon pathway and accelerate energy transition plans.

If revised accordingly, the Guidelines will have a positive impact on the prevention of green-washing and decrease barriers to responsible investment, reduce unfair competition and increase capital flows deriving from sustainable/ESG products and services. The Guidelines can also boost retail investor trust and confidence in financial markets if executed in a harmonised and easy-to-understand manner. However, the current Guidelines, especially as far as the use of negative screening approaches only is concerned, may result in the opposite outcome instead.