ESMA said that terms in funds’ names should be “supported in a material way by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy.” It is seeking industry feedback on the proposed introduction of quantitative thresholds for the minimum proportion of investments sufficient to support the ESG or sustainability-related terms in funds’ names.
ESMA has proposed a new quantitative threshold of 80% for the use of ESG-related words and an additional threshold of 50% for the use of “sustainable” or any sustainability-related term. It has also proposed the application of minimum safeguards to all investments for funds using such terms and additional considerations for specific types of funds, including index and impact funds. The draft guidelines would apply three months after the publication of their translation on the EMSA website, with a six-month transitional period for funds launched prior the application date.
Mark Shaw of Pinsent Masons said: “The EU’s Sustainable Finance Disclosure Regulation (SFDR) had a difficult birth and is flawed in many respects. While there may be a sound intent behind the proposals, the execution is questionable, with the double threshold likely to cause additional confusion to both fund promoters and investors, noting that the US and UK have a single threshold. Furthermore, the proposed rules include a narrow definition, which risks creating bubbles in compliant assets.”
“Alternatively, the narrow definition may simply put managers off attempting to meet the threshold altogether; we have seen some evidence of this with managers being put off Article 9. Finally, the 80% threshold seems arbitrary, and hard limits are not suitable to all asset classes or investments outside the EU,” Shaw said.
He added: “One curiosity is that the proposals recognise that the market is evolving to differentiate within Article 8 to include ‘Article 8+’ as a sub-category. In proposing minimum portfolio composition commitments in order to use certain fund names, ESMA is validating the market’s distinction and – one might argue – introducing the sub-category by the backdoor.”
Patrick Eicher of Pinsent Masons said: “With its current consultation, ESMA is also aiming to address potentially differing national approaches, and thereby mitigating the risk of green ‘forum shopping’. It will be interesting to see if and to what extent currently ‘green’ advertised portfolios as well as their labeling will need to be re-arranged – similar to the latest forced downgrading of numerous Article 9 funds by various reputable fund managers.”
Claire Winrow of Pinsent Masons added: “Managers planning to raise funds with an ESG or sustainable focus should consider the proposals in ESMA’s draft guidelines. While in draft form, the guidelines provide an indication of ESMA’s current thinking around expectations of managers meeting minimum thresholds of investments to meet the environmental or social characteristics or sustainable investment objectives in accordance with the investment strategy.”
ESMA will consider the feedback it receives after the consultation closes on 20 February 2023 and will publish finalised guidance afterwards.
