"The guidelines are seen as a future essential standard in the European financial landscape, and it would be frowned upon for a national authority not to comply with them." - Sabrine Aouida, Chief Impact Officer at Weefin
Faced with the growing risk of greenwashing in the European financial market, the ESMA (European Securities and Markets Authority) recently published new guidelines regarding fund names. This issue is of paramount importance as fund names are often the first piece of information investors look at, thus influencing their investment choices. With these guidelines, ESMA aims to prevent the misleading use of terms such as "sustainable" or "transition" in fund names that do not meet certain ESG requirements.
The main aim of these new guidelines is to ensure that fund names accurately reflect their sustainability investment strategy. Specifically, funds wishing to retain ESG terms in their names will have to prove that at least 80% of their investments are aligned with ESG characteristics, or that at least 50% of their investments are sustainable as defined by SFDR. Depending on the terms used, funds will also have to comply with specific exclusions, in line with those of the Climate Transition Benchmark (CTB) or the Paris Aligned Benchmark (PAB).
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The ESMA's Final Report, published in May 2024, was followed by the translation of the text into all official EU languages on August 21 (find the different translations here). This date marks the start of a three-month period, at the end of which the guidelines will come into effect for all new funds. Existing funds will have an additional six months to comply with the new rules, until May 2025. For funds in breach, two options are available: either change their name by removing the ESG terms or modify their strategy to align with the new requirements associated with the vocabulary used.
To continue using ESG-related terms in their name, funds will need to meet a minimum threshold of 80% of investments aligned with ESG characteristics or the definition of sustainable investment under SFDR. They will also have to apply the exclusions from the Climate-Transition Benchmark (CTB) or Paris-Aligned Benchmark (PAB), depending on the vocabulary used. For example, if a fund’s name evokes social characteristics, then the fund’s investment policy must meet the CTB exclusion thresholds. Finally, funds using terms such as "impact" or "transition" will need to demonstrate that they are following a clear and measurable path of social or environmental transition. Â
This new approach creates a more transparent framework for investors but also imposes greater rigor on asset managers in designing and communicating their financial products.
These guidelines are still flexible, as noted by Sabrine Aouida, Chief Impact Officer at Weefin: “A guideline is neither a directive nor a regulation. It is not mandatory for European regulators, but it is relatively easy to adopt," particularly for French funds since “the AMF doctrine already governs the application of SFDR in France.” "The guidelines are seen as a future essential standard in the European financial landscape, and it would be frowned upon for a national authority not to comply."
Table of requirements according to terms used
The initial consultations raised questions about the treatment of "transition" funds. Their strategy still allows for investments in fossil fuels, and requiring them to comply with the Paris Aligned Benchmark exclusions would have been too punitive. The final version established that transition funds could align with the less restrictive CTB exclusions. This also applies to those using the terms “social” and “governance,” as these words do not necessarily imply an ecological dimension.
It should also be noted that, following these consultations, ESMA opted to identify the terms governed by its guidelines using lexicons or "terms giving the impression" rather than a list of words. This decision helps prevent issues related to the ambiguity of translating certain terms, as is the case for the notion of transition in French.
Measuring the immediate impact of these new guidelines is no easy. However, a study by Morningstar reveals that among the 4,300 European funds whose names are linked to ESG or sustainability, nearly 2/5 may be in breach. Among these funds, around 500 will need to make significant changes to their portfolios to retain their names. This situation highlights the relevance of ESMA’s new guidelines: more than 10% of European funds claiming to be aligned with ESG characteristics may actually be exposed to a risk of greenwashing.
By imposing these new rules, ESMA aims to foster a climate of trust and transparency in the financial sector. At WeeFin, we believe this directive represents an opportunity for funds to strengthen their ESG commitment and improve transparency towards investors.
In light of these new requirements, WeeFin positions itself as a key partner to support you in this transition. With ESG Connect, you can not only integrate your own definition of sustainable investment under SFDR but also monitor in real-time or through simulations the percentage of your portfolio aligned with this definition. Our platform provides you with all the tools you need to not only comply with these new requirements but also to strengthen your position as a leader in sustainable finance.
