EU Cracking Down on "Greenwashing" in Fund Names

Aalto Capital had the pleasure of attending the ESG Fintech Forum earlier this month, where some of the biggest ESG roadblocks were addressed, along with the role technology will play in transforming strategy. One of the many intriguing topics discussed was "Greenwashing," the deceptive practice of marketing financial products as environmentally friendly or sustainable when they are not.

Recently, the European Securities and Markets Authority (ESMA) issued guidelines that may require some firms to rename specific funds, including both those that have already closed and those currently being marketed.

These guidelines, published in May this year, provide rules on the use of ESG-related terms (such as "sustainability," "green," "climate," "environmental," "impact," and "transition") in the names of funds marketed by EU-regulated firms. The rules vary depending on the specific term used, with the most stringent requirements applying to funds with any term derived from the word "sustainable" in their name.

Under the new guidelines, funds with "sustainable" or similar names will need to meet the following criteria:

1. At least 80% of the fund's portfolio must be invested in assets that match the sustainability characteristics promoted by the fund.

2. Investments prohibited by the EU Benchmark Regulation must be excluded from the portfolio.

3. The fund must "invest meaningfully" (no specific threshold given) in "sustainable investments" as defined by the Sustainable Finance Disclosure Regulation (SFDR).

Funds with other ESG-related terms in their names will face slightly different requirements, but all will need to ensure that at least 80% of their investments are consistent with the ESG characteristics of the product.

National regulators in EU Member States have until mid-July 2024 to decide whether to apply them to the fund managers they regulate. Some industry associations may lobby for partial adoption, as concerns have been raised regarding the application of these rules to fully closed, closed-ended funds and funds with only institutional investors.

Fund managers whose national regulators adopt the guidelines will need to comply with the guidelines for new funds starting in autumn 2024. Existing funds will have an additional six-month grace period to either comply or change their fund's name.

This crackdown on greenwashing in fund names is part of the EU's broader efforts to combat misleading environmental claims and promote transparency in sustainable finance.

Aalto Capital closely monitors these developments to be able to advise firms operating in the EU to prepare for potential changes to their fund naming conventions and marketing materials.