Tackling greenwashing is one of the key priorities in ESMA’s Strategy on Sustainable Finance.
Assessing how investment funds promote themselves (through their names and documentation) and investigating whether issuers benefit from an ESG pricing effect are important first steps in detecting and monitoring greenwashing in the EU funds industry, according to ESMA.
In its findings, ESMA have confirmed the need for guidelines to ensure that fund names accurately reflect their portfolio from an ESG perspective (as suggested in a related consultation paper towards the end of 2022) and standardised disclosures in the form of templates. On the other hand, ESMA has found no evidence of a “greenium” pricing advantage (see below).
Greenwashing stems primarily from misleading, confusing, or inaccurate claims in relation to a financial product’s ESG credentials. For example, the name of a fund can be a source of greenwashing if the name does not reflect the fund’s actual sustainability profile. Due to strong investor demand for ESG investment products, greenwashing has become a source of regulatory concern, particularly as there is no official EU label for ESG or sustainable investment products and SFDR focuses on disclosure rather than classification. ESMA seeks to foster investor confidence and trust in the accuracy of ESG disclosures to ensure that ESG products remain attractive.
In its bid to tackle greenwashing and boost investor confidence in the sector, ESMA conducted two analyses which culminated in the publication of the following articles:
ESMA subsequently held a webinar to discuss the findings of the two articles and published the following presentations:
ESG Names and Claims in the EU Funds Industry
ESMA examined over 36,000 funds managing around €16 trillion of AuM (spanning from mid-2013 to mid-2023) for the use of ESG terms in their names; and the extent of ESG language used across 100,000 regulatory and marketing documents (available at the end of 2022) covering more than 18,000 funds.
ESMA’s key findings are as follows:
European Sustainable Debt Market: Do Issuers Benefit from an ESG Pricing Effect?
The “greenium” is pricing benefits for sustainable debt issuers, where investors are willing to pay extra or accept lower yields in exchange for sustainable impact. Due to increased investor demand for sustainable financial products, the issuance of sustainable-labelled debt has rocketed in recent years and some research has suggested that debt issuers of such debt benefit from the greenium. However, the evidence has been inconclusive and confined to green bonds. In ESMA’s article, it considers all ESG bond types, by constructing a unique dataset of outstanding ESG and conventional bonds from EEA issuers based on commercial data from Refinitiv Eikon and by conducting multiple model and sample specifications. It also considers the key factors involved in the greenium. ESMA’s key findings are as follows:
ESMA’s work is part of its ongoing efforts to develop innovative analytical tools for supervisory and regulatory purposes, including to identify and address greenwashing and feed into ongoing regulatory efforts regarding ESG disclosure requirements for funds.
ESMA will continue to scale up the monitoring and supervision of greenwashing and has suggested conducting an additional analysis of non-English documentation and documentation across the alternative investment fund market.
ESMA is also considering further research to investigate the conditions under which investors may be more willing to opt for sustainable investment instruments and forego returns, or to assess the margin of missed profits investors would be willing to accept to support a sustainable transition. ESMA will continue to monitor these and related market developments in the future.
Please contact a member of our Financial Services team (David Naughton, David Williams, Katrina Smyth, Narita Woods or Mina Dawood) if you require further information on ESMA’s findings and/or on ESG in the context of regulated financial products.
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