New ESMA Guidelines: ESG Fund Names

The demand for ESG funds and sustainable financial products has strongly increased in recent years, a trend that is expected to continue growing. However, investors often struggle to assess the true sustainability of ESG-labeled products, raising concerns for “greenwashing”. To address this, the European Securities and Market Authority (ESMA) has issued new guidelines on using ESG and sustainability-related terms, which will become binding by the end of 2024. 

There are two requirements:  

  • Funds using terms like “ESG”, “Sustainability”, “Impact” or “Transition” allocate a minimum of 80% of their investment to meet the environment or social characteristics specified in their objectives.  
  • Specific exclusion criteria apply depending on the term used.  
  • Funds labeled with “ESG”, “Sustainability” and “Impact” must align their portfolios with the 1.5-degree goal of the Paris Agreement 
  • Funds labeled with “Transition” as well as “Social” and “Governance” related terms have exclusion requirements tied to lower emission objectives. 

This differentiation acknowledges that “Transition”, “Social” and “Governance” funds have different objectives compared to more environmentally focused investment products, and they may not prioritise emission reduction to the same extent. Nevertheless, they are still required to contribute to a low-carbon economy and include environmental considerations.  

The ESMA guidelines primarily emphasise the environmental aspect of sustainability, missing out one establishing standards for also the social and governmental dimensions. Moreover, both “ESG” and “Sustainability” are understood as environmental terms feeding into an incomplete understanding of sustainability. Consequently, while the ESMA guidelines enhance transparency regarding environmental sustainability, they fall short in addressing the lack of transparency within the social and governance dimension.  

Denominator fills this gap by providing fact-based and quantifiable data to enhance transparency within the social aspect of sustainability. Leveraging a global database of over 3 million companies, Denominator is creating accountability within the social dimension of sustainability, thereby empowering meaningful change. 

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