EU ESG fund labelling rules won’t address greenwashing

Proposed rules on the use of ESG or sustainability-related terms in the names of investment funds unveiled by EU markets regulator the European Securities and Markets Authority (ESMA) will not fulfil their primary objective of protecting investors from greenwashing risk, according to Europe’s central investment industry trade association, the European Fund and Asset Management Association (EFAMA).

ESMA unveiled the proposed rules in November 2022, aimed at providing asset managers with clear criteria for the use of ESG or sustainability-related terms for funds, in order to ensure that investors aren’t misled about the investment products’ ESG characteristics.

Proposals included in the consultation primarily focused on the minimum proportion of investments required to support an ESG-related fund name. Specific proposals included an 80% threshold for the use of ESG-related words, an additional 50% threshold for the use of “sustainable” or any sustainability-related term, as well as rules for funds using exclusion criteria and for specific types of funds such as impact funds.

In its response to ESMA’s consultation on the new rules, however, EFAMA raised several concerns regarding the regulator’s proposed threshold approach, including interoperability issued with other regulatory systems such as MiFID or the EU’s Sustainable Finance Disclosure Regulation (SFDR), and a lack of clarity on many key sustainable finance concepts, such as “what exactly qualifies as a sustainable investment.”