SFDR
Combating greenwashing – ESMA publishes updated guidelines on funds’ names using ESG or sustainability-related terms
On 14 May 2024, ESMA published its final report on guidelines on funds’ names using ESG or sustainability-related terms. Investor demand for ESG funds has surged, raising concerns about greenwashing and misleading sustainability claims by funds. To address this, ESMA initially proposed guidelines in a public consultation on 18 November 2022 for using ESG or sustainability terms in fund names. Following the consultation, seeking to establish thresholds for using ESG-related terms, ESMA adjusted the guidelines based on significant stakeholder feedback.
Funds using transition, social, and governance terms in their names must meet an 80% investment threshold aligned with environmental or social characteristics and exclude investments in certain controversial sectors. Environmental and impact terms have the same 80% threshold and additional exclusions for fossil fuels. Sustainability-related funds must also meet the 80% threshold, exclude specified investments, and commit to significant sustainable investments as per SFDR guidelines. Combined terms should meet the cumulative provisions, except when combined with transition-related terms, which follow specific rules. Funds referencing an index must meet the guidelines for using these terms. Transition and impact funds must ensure their investments are on a measurable path to social or environmental transition or generate measurable positive impacts alongside financial returns.
Authorities should monitor compliance throughout the fund's life, correcting any temporary deviations not due to deliberate choices. Further investigation is warranted if there are significant discrepancies in investment levels or misleading use of terms.
The final guidelines will be translated into EU languages and published, triggering a two-month compliance notification period. The guidelines will take effect three months after publication, with transitional provisions for existing funds, meaning that managers of existing funds will have a minimum of nine months to become compliant.
ESAs opinion on the assessment of the SFDR
On 18 June 2024, ESMA published a joint ESAs opinion on the assessment of the SFDR (the “Opinion”). This Opinion, adopted by the Boards of Supervisors of the ESAs, is addressed to the European Commission, with copies sent to the European Parliament and the Council
In September 2023, the European Commission launched targeted and public consultations on the SFDR. Having considered ESAs’ and national competent authorities’ global overview on how the SFDR has increased transparency on sustainability for investors and facilitated sustainable investment in line with the Green Deal objective, the ESAs, through their Joint Committee, have developed several sets of draft Regulatory Technical Standards (“RTS”) under the SFDR. On 4 December 2023, the ESAs published the Final Report on draft RTS concerning principle adverse impact and financial product disclosures. Despite these advancements, the ESAs recognise that SFDR templates may be seen as complex and challenging in particular for retail investors, as indicated by consumer testing. Additionally, financial market participants have used SFDR classifications for marketing purposes, leading to greenwashing and mis-selling risks.
To mitigate these issues, the Opinion recommends introducing a categorisation system and/or sustainability indicators for financial products, simplifying disclosures to empower retail investors better understand the sustainability profile of these products. It also suggests revisiting the definition of “sustainable investment”, expanding the scope of SFDR to include more products and simplifying the documentation. Further recommendations include enhancing transparency on adverse sustainability impacts and incorporating technical changes to improve the SFDR framework.
In view of the stakeholder feedback assessment performed by the European Commission to refine the European framework for sustainable finance, the ESAs urge the Commission to undertake consumer testing for new policy options to ensure effective outcomes and stand ready to provide additional technical assistance as required. The aim is to create a coherent sustainable finance framework that supports the transition to sustainable finance while protecting investors, enhancing their trust, confidence, and participation in financing the economy.