ESMA utilised natural language processing ("NLP") techniques to analyse the names of more than 36,000 funds with €16 trillion of assets combined with a dataset of over 100,000 fund documents. It found that the share of UCITS with "ESG" - or environmental, social and governance - in their name has increased from less than 3% in 2013 to 14% this year.

ESMA's study points to the following findings:

  • An increasing number of funds include ESG terms in their names and, of the ESG terms included, funds prefer to include broad ESG terms (such as "sustainable") rather than more specific environmental or social words. There is also evidence of high and consistent investor appetite for funds with an ESG-related term in their name, relative to funds without any ESG words in their name.
  • In the absence of EU ESG labels, some asset managers have begun to refer to the Sustainable Finance Disclosure Regulation ("SFDR") Articles 8 and 9 designations as proxy ESG labels. Funds with ESG-related language in their name, and funds disclosing under Article 9 of SFDR, also provide more extensive ESG disclosures in their investment strategy and documentation than other funds.
  • The findings point to differences between document types (i.e. regulatory documentation compared to marketing material), suggesting that fund managers adapt their communication based on the expected types of readers. While only 23% of examined funds' investment strategies contain at least one ESG word, this percentage increases to 80% for KIIDs/KIDs and even to 90% for marketing documents. The study concludes that funds that target retail investors appear to make additional ESG claims in the KID/KIID documents created specifically to enhance retail investors' understanding of the fund. These same funds, however, do not make particular efforts (relative to institutional funds) in documents that are not standardised and regulated (e.g. marketing materials). This highlights to ESMA the importance of ensuring consistency and improving investor protection across different types of documentation.

Tackling greenwashing is one of the key priorities in ESMA's sustainable finance strategy and its assessment of how investment funds signal themselves (via their name or via their documents) is significant given that greenwashing stems – first and foremost – from misleading, confusing, or inaccurate claims. This report is also significant in that it reflects ESMA's scaling-up of its ongoing detection and monitoring efforts leveraging from the latest NPL methods, in the area of greenwashing risks.

Furthermore the study supports on-going regulatory efforts regarding ESG disclosure requirements for investment funds. In this regard, recent reports indicate that ESMA intends to proceed with its proposal for guidelines on the use of ESG or sustainability-related terms in funds' names. Under the proposed draft guidelines, a fund would only be able to use ESG-related words in its name if 80% of its investments meet environmental or social characteristics or sustainable investment objectives, while a fund with sustainable in its name, or words derived from it, would need to meet an additional 50% threshold related to sustainable investments. The funds industry across Europe will be closely examining the wording of the thresholds once the new naming guidelines are implemented given their potential to trigger a wave of fund name changes and associated compliance obligations across the sector.

ESMA has organised a public webinar and Q&A session on October 19, including a presentation from the authors of the names and claims report on their key findings.

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