Further EU ESG regulatory developments: New SFDR RTS Q&A, greenwashing call for evidence, and proposed thresholds for ESG-related fund names

It’s been a busy second half of the week in the EU regulatory landscape, with European authorities publishing further guidance on the SFDR RTS, a new call for evidence on greenwashing and consulting on introducing minimum thresholds for using ESG terminology in fund names. We provide a brief overview of the key points on each update, below.

ESAs Q&A on SFDR RTS

With the SFDR RTS due to apply from 1 January 2023, the European Supervisory Authorities (ESAs) have published a Q&A that provides helpful clarification on the interpretation of the RTS for managers. Much remains unanswered however and the Q&A arguably opens up further questions.

The level of detail is extensive here and we pick out below some of the key points for managers:

• Data collection PAI disclosures
• Examples of how to understand some of the PAI indicators in practice
• Scope
• Good governance
• Definition of socially sustainable investments
• Taxonomy-alignment
• Completion of the fund-level templates under the RTS

ESAs call for evidence on better understanding greenwashing

On 15 November 2022, the European Supervisory Authorities (ESAs) published a call for evidence on potential greenwashing practices in the EU financial services sector. The ESAs seek input from various stakeholders on how to understand greenwashing and what its drivers might be, and requests examples of potential greenwashing practices and any available data.

The ESAs broadly aim to develop a more concrete sense of how to understand greenwashing as a phenomenon (including its scale and related risks), taking stock of the implementation of sustainable finance legislation and mapping out supervisory response and assessing adequacy as part of its input to the Commission on greenwashing risks, occurrences and challenges in the EU.

Comments are invited by 10 January 2023 and will be published thereafter. This call for evidence reiterates the importance the European authorities place on this issue and emphasises this as an area managers should be focused on when marketing their funds.

ESMA Consultation Paper on guidelines on funds’ names using ESG or sustainability-related terms

ESMA is consulting on introducing quantitative thresholds that managers will have to adhere in order to use “ESG-related”, “impact-related”, “sustainable” (and terms derived from “sustainable”), “impact” or “impact investing” terminology in their fund names. The proposals reflect ESMA’s ambitions to tackle greenwashing in the context of Article 8 and Article 9 SFDR funds, and builds on the principles-based guidance it provided on fund names (amongst other topics) in its supervisory briefing in June 2022.

The criteria is broken down by two key criteria:

• If a fund uses any “ESG-related” or “impact-related” words in its name (it appears that the term “Climate” would be captured here), a minimum proportion of at least 80% of its investments should be used to meet the E/S characteristics or sustainable investment objective and such investments must be in accordance with the binding elements of the fund’s investment strategy.
• If a fund uses the word “sustainable” or any other term derived from the word “sustainable” in its name, 50% within the 80% general threshold above should be a minimum proportion of ‘sustainable investments’ as defined under Article 2(17) SFDR.

ESMA is consulting on recommending that the remaining portion of investments should meet certain minimum safeguards based on the exclusion criteria in the Benchmark Regulation (i.e. the exclusion criteria that apply to Paris-aligned benchmarks such as excluding controversial weapons, tobacco, UNGC/OECD violators and companies with certain exposures to fossil fuels).

The term “impact” or “impact investing” should also only be used by funds meeting the above thresholds, and additionally whose investments under the thresholds are made with the intention to generate positive, measurable social or environmental impact alongside a financial return. Index tracking funds will also be subject to the criteria above.

The consultation closes on 20 February 2023 with ESMA expecting the final Guidelines to be issued by Q2/Q3 2023. The Guidelines would then apply three months after publication (i.e. Q3/Q4 2023).

ESMA is consulting on proposals for funds that launch prior to the application date and do not meet the above threshold requirements to be provided with a six month transitional period to either:

• Change their name to no longer have ESG or sustainability-related terms, or
• Bring investments in line with the criteria above.

However, ESMA has indicated that where a fund does not demonstrate that it meets the thresholds above, and competent authorities considers that the fund’s name would be misleading to investors, competent authorities would be invited to communicate these issues at an early stage to managers and cooperate effectively to find a common position.

The above criteria will potentially have the greatest impact on managers with ‘light-green’ Article 8 funds that only partially make investments that promote environmental and/or social characteristics. The proposals complement the product categories in the SFDR, as it is anticipated that the information on the minimum proportion will be provided in the pre-contractual and periodic disclosure templates for Article 8 and Article 9 products.