EU Finalizes Investment Fund Labels to Combat Greenwashing

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The European Union’s securities watchdog confirmed on Tuesday final guidelines on when investment funds can label themselves as being “sustainable” without being accused of greenwashing.

Trillions of dollars globally have flowed into investments that promote their green attractions, but regulators say that some funds exaggerate sustainability claims.

The European Securities and Markets Authority (ESMA) said a fund that has any environmental, social or governance (ESG) related words in its name must have at least 80% of assets that meet ESG objectives in accordance with the binding elements of its stated investment strategy.

The minimum is in line with draft guidance that ESMA put out to public consultation.

The watchdog ditched its initial plan for a 50% threshold for investment funds that label themselves as being sustainable.

ESMA said that it has decided instead to introduce a commitment to invest ‘meaningfully’ at all times in sustainable investments, when using any sustainability-related words in a fund’s name.

It has also introduced a new category for transition-related terms, which also includes the 80% minimum rule, to avoid penalizing investment in companies that derive part of their revenue from fossil fuels, thus promoting strategies aimed at moving to a greener economy.

“The objective of the guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names,” ESMA said in a statement.

Managers of existing funds have about nine months to comply, while new funds will have to comply sooner.

Britain, now outside the EU, will introduce from the end of May its first bespoke labeling rule to combat greenwashing in finance, with regulators in the United States also taking action.

(Reporting by Huw Jones; Editing by Susan Fenton)