Financial Crime World

Malta’s Financial Watchdog Unveils ESMA Guidelines for Funds with ESG-related Names

The European Securities and Markets Authority (ESMA) has introduced new guidelines aimed at protecting investors against greenwashing risk by setting minimum standards for funds available in the European Union that use specific ESG terms in their names.

New Guidelines: What You Need to Know

  • The guidelines came into effect on May 14, 2024, and require funds to meet new portfolio requirements or change names.
  • Funds with ESG-related names must meet a minimum of 80% of investments that meet environmental or social characteristics or sustainable investment objectives.
  • Investments in companies that:
    • Derive more than a certain percentage of revenues from fossil fuels
    • Are violators of the UN Global Compact principles or OECD guidelines
    • Are involved in tobacco cultivation and production, or controversial weapons
  • “Meaningful” investments in sustainable investments (no further guidance provided)

Concerns Among Asset Managers

  • Fear fragmentation of the EU market and varying interpretations of what constitutes “meaningful” investment in sustainable assets.
  • Reluctance to set minimum thresholds for sustainable investment.
  • Over 4,300 EU funds may fall within the scope of the new guidelines.
  • More than 1,600 funds exposed to stocks potentially in breach of PAB and CTB exclusion rules.
    • About two-thirds of these funds may need to divest from affected stocks or rebrand.

Affected Sectors and Countries

  • Energy, industrials, and basic materials sectors most affected by potential divestments.
  • TotalEnergies, Tencent Holdings, and Shell among the most affected stocks.
  • United States, France, and China would be the most affected countries in terms of market value.

Options for Asset Managers to Prepare for the New Guidelines

  • Increase allocation to sustainable investments
  • Tweaking sustainable-investment measurement methodologies
  • Reposition as transition funds
  • Rebranding to remove ESG-related terms

Timeline for Implementation

  • ESMA guidelines expected to apply after translation into all official languages and publication on the ESMA website, possibly by June 15, 2024.
  • New funds affected three months after publication, existing funds nine months after.