The European Securities and Markets Authority (ESMA) has decided on guidelines for funds claiming to contribute to sustainability objectives, including the climate transition.
The EU supervisor has updated draft rules governing how fund managers can use sustainability- and ESG-related language in their products. The guidelines were put out for consultation more than one year ago.
“ESMA has considered the feedback received from stakeholders to the public consultation and agreed amendments to the Guidelines compared to the text consulted upon,” it said in a statement last week.
The guidelines have not yet been formally published, however, with ESMA saying this is postponed until Q2 2024 to leave enough time for reviews of sectoral funds legislation to enter into force. This is expected to happen in the first quarter of next year.
Loosening of rules
One of the biggest changes is a loosening of rules for funds using terms derived from the word ‘sustainability’ in their names. Originally, ESMA wanted all such funds to allocate at least half of their assets to “sustainable investments” based on definitions within the Sustainable Financial Disclosures Regulation (SFDR).
ESMA has now decided it “no longer considers that this threshold should be retained” and has agreed that those funds should instead follow the same rule as funds with ‘ESG’-related names – allocating at least 80% of their assets that are in line with their stated strategy.
However, they should still “invest meaningfully in sustainable investments defined in Article 2(17) SFDR, reflecting the expectation investors may have based on the fund’s name,” ESMA added.
References to climate benchmarks
The guidelines will require sustainability-related funds to adhere to exclusions developed for Paris-aligned Benchmarks (PABs), screening out companies involved in controversial weapons and tobacco, as well as those deemed to have violated the UN Global Compact or the OECD Guidelines for Multinational Enterprises.
PABs also ban investments into firms that derive more than 1% of revenues from coal and lignite, 10% from oil, or 50% from gas. Businesses that generate more than half their revenue from carbon intensive electricity are also screened out.
But ESMA wants to make allowances for funds marketed as contributing to the climate transition – rather than already being green – and those pursuing social or governance-related objectives.
For those using “transition”-related terms, it has introduced a new category with exclusions based on the EU’s Climate Transition Benchmarks. These are less strict than PABs, and allow investments into fossil fuels.
“This amendment is designed to not penalise funds with those terms in their names that pursue strategies fostering a path to transition towards a greener economy,” the watchdog said.
It added that funds using words like ‘transition’ – as well as those using impact-related terms – should demonstrate that their investments “are made with the intention to generate positive, measurable social or environmental impact alongside a financial return or are on a clear and measurable path to social or environmental transition”.
Read the digital edition of IPE’s latest magazine
No comments yet