European Markets Regulator Provides Guidance for Supervision of Sustainable Investing Funds

EU markets regulator the European Securities and Markets Authority (ESMA) announced the release of a new supervisory briefing aimed at aligning the supervision of investment funds with sustainability features. The briefing includes a series of proposed requirements for national competent authorities (national-level regulatory authorities, or NCAs) to implement relating to the marketing and naming of sustainable investment funds, and the integration of sustainability risks by fund managers into their portfolio and risk management practices.

The guidance comes as regulators in the EU are moving to implement rules aligned with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy, key elements of the EU Action Plan on financing sustainable growth.

ESMA stated that the new guidance will “help combat greenwashing by establishing common supervisory criteria” for the NCAs to supervise funds with sustainability features.

Proposed practices for the marketing of sustainable investment products include ensuring that information provided to investors is “accurate, fair, clear, not misleading, simple and concise,” and that disclosure of environmentalEnvironmental criteria consider how a company performs as a steward of nature. More or socialSocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. More criteria used in the selection of assets only include those that are actual binding on the fund manager.

The guidance includes proposals for the supervision of fund names, with uses of terms including “ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More,” “green,” “sustainable,” ”socialSocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. More,” “ethical,” and “impact,” in a fund’s name only to be used when supported by evidence of sustainability characteristics in the fund’s objectives and investment strategy. Use of the word “impact” in a name, for example, should only be used if the fund’s objective includes the generation of positive and measurable socialSocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. More and environmentalEnvironmental criteria consider how a company performs as a steward of nature. More impact in addition to financial returns.

Beginning in August, all authorized fund managers in the EU will be required to to integrate sustainability risks in their portfolio and risk management processes. In its guidance for supervisors in areas relating to the integration of sustainability risk, ESMA notes that while large fund managers often already have tools in place to assess portfolio sustainability risk, smaller and mid-sized managers may struggle to comply with the new rules. Proposals for regulators included ensuring that managers perform periodic reviews of their internal policies, and that supervisors perform “desk-based and/or on-site reviews” of the implementation of the policies and procedures.

Click here to access the ESMA supervisory briefing.

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