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ESMA's 2024 Guidelines: Paving the Way for Ethical Investments in ESG Funds

By: Alexandre Tiesset | July 24, 2024

ESMA's 2024 Guidelines: Paving the Way for Ethical Investments in ESG Funds
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The name of a fund is often the first and sometimes the only point of contact before investing. Individual investors frequently lack the patience to read through the extensive legal documents that fund managers must produce to ensure transparency. However, fund naming has so far been minimally regulated.

The urgency of climate issues and the growing interest in sustainable and responsible investment have increased the supply of ESG investment funds. Many funds now use terms such as "ESG," "Sustainable," "Transition," and "Net Zero" in their names. Yet, not all of these funds have adopted a sustainable finance label (e.g., French SRI Label, Towards Sustainability, FNG Siegel), which somewhat guarantees alignment with their marketed features. A common and ambitious label is still missing from the sustainable finance directives adopted in the “Green Deal” package.

How can we ensure the integrity of fund names for investors? A recent example is the German manager DWS, fined $19 million for exaggerating the ESG characteristics of its investment funds. To prevent such issues, the European Securities and Markets Authority (ESMA) published its final report on the names of ESG funds in May 2024, incorporating feedback from stakeholders. Key points include:

Fund Naming Categories

          1. Transition Funds: "Transition," "Improve," "Progress," "Evolution," "Net Zero"
          2. Environmental Funds: "Green," "Environmental," "Climate," "ESG," "SRI"
          3. Social Funds: "Social," "Equality"
          4. Governance Funds: "Governance," "Controversies"
          5. Impact Funds: "Impact Investing," "Impactful," "Impacting"
          6. Broad ESG Funds: "Sustainability," "Sustainable"

Each category must comply with minimum standards to use these keywords based on European legislative guidelines. The main criteria are:

          • 80% of investments must meet social or environmental characteristics (based on the European taxonomy and indicators in Annex II and III of the SFDR directive).
          • Exclusions from the Paris Aligned Benchmark (PAB) directive:
              • Controversial weapons
              • Tobacco production
              • Violation of UNCG or OECD guidelines
              • Coal extraction (1%)
              • Oil extraction (10%)
              • Gas extraction (50%)
              • Carbon-intensive electricity production (+100gCO2/kWh)
        • Exclusions from the Climate Transition Benchmark (CTB), equivalent to points a, b, and c above, also known as "minimum safeguards."

Generalist funds, “S” funds, and “G” funds must apply only the minimum safeguards. "Transition" and "Impact" funds, in addition to the minimum safeguards, must meet the 80% investment threshold with social or environmental characteristics. "Transition" funds must demonstrate a clear and measurable social/environmental trajectory, while "Impact" funds must show that their investments generate a measurable positive impact alongside financial returns.

Funds with an environmental emphasis, including terms like ESG and SRI, must meet all these criteria simultaneously and exclude fossil fuels.

In conclusion, these guidelines will provide investors, especially individual ones, with certain guarantees to select more sustainable investments. Managing controversies will be a crucial challenge for any fund manager offering a range of ESG funds.


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