In recent years, many investors have considered the necessity of reducing GHG emissions to combat climate change and global warming when making investment decisions. As a result, several investment funds now use the phrases “ESG” or “Sustainability” in their names to appeal to ecologically and socially sensitive investors.
However, incorporating these environmentally and socially conscious elements in their names does not guarantee that these funds will contain many companies concerned with sustainability and a low-carbon future. Indeed, several funds have fooled their sustainability-conscious investors by using these letters in their names, but the companies in their portfolios show minimal commitment to ESG. This greenwashing practice caused the European Securities and Markets Authority (ESMA) to issue new rules governing when investment funds can use phrases like ESG, sustainability, and impact in their names. The ESMA’s goal is to protect clients from being misled by investment funds that use these words to recruit customers without producing a truly sustained impact.
According to the new legislation, if a fund’s name contains any ESG-related elements, at least 80% of its investments must meet environmental or social criteria. Funds whose names include the word “sustainable” or a term derived from it must invest at least 50% in sustainability. Furthermore, if the investment funds’ names include the word “impact” or “impact-related term,” they must meet certain quantitative standards for investments that provide positive, quantifiable social or environmental benefit in addition to economic return. The ESMA believes that enforcing these new standards will help protect investors from being deceived by the names of investment funds, hence decreasing greenwashing risks.
These new EU requirements came in tandem with the Securities and Exchange Commission’s (SEC) new guidelines on climate-related disclosure. The SEC requires public corporations to publish information about climate-related risks if they have a significant impact on the company’s business strategy, business model, or financial conditions. The disclosure will be required in registration statements and other routine filings, including Form 10-K for domestic issuers and Form 20-F for foreign private issuers. The SEC’s new regulation also requires a statement of management’s responsibility in monitoring and assessing such climate risks. It also requires corporations to describe the board’s oversight role in risk management and evaluation.
Author: Quyet Pham, Ph.D.
