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EFAMA questions the threshold approach in ESMA’s proposed guidelines on the use of ESG terms in fund names

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The European Fund and Asset Management Association (EFAMA) has today published its response to the ESMA consultation on guidelines on funds’ names using ESG or sustainability-related terms.

EFAMA members have concerns around the proposed numerical threshold approach as it may not address the underlying greenwashing issues our industry is facing due to the current lack of clarity on many key sustainable finance concepts.

EFAMA is in favour of setting common rules in order to avoid misleading information and to enhance trust and clarity in the market, especially in the fast-evolving ESG landscape. However, EFAMA suggests that ESMA delays their proposed guidelines until the lack of clarity on what constitutes a “sustainable investment” is rectified and they have worked together with the European Commission to resolve interoperability issues between the guidelines and SFDR, MiFID/IDD etc.

Anyve Arakelijan, Regulatory Policy Adviser at EFAMA, says: “It is unlikely that a methodology built on an unclear legal definition will increase investor understanding of ESG funds and adequately address greenwashing concerns. Rather than imposing a threshold, it would be more proportionate to mirror ESMA’s supervisory guidance on sustainability risks and disclosures by ensuring that use of ESG-related terms is supported in a material way with sufficient evidence of sustainability characteristics in the fund’s investment objectives and strategy.”

If ESMA proceeds with the numerical threshold approach, there are a number of important elements which would still need to be addressed, EFAMA says.

·       Cash, cash equivalents, and derivatives used for hedging should be excluded from an 80 per cent ratio calculation to allow for efficient fund management, especially during extraordinary market circumstances.

·       The lack of clarity on what exactly qualifies as a sustainable investment under SFDR, calls into question the appropriateness of a separate threshold of 50 per cent.

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