Spanish fund managers have classified 285 investment funds as ‘Article 8’, that is, they consider that they “promote environmental and/or social characteristics,” according to the European Commission’s Disclosure Regulation. These products, also known as light green in the industry, are ESG investments, meaning they apply environmental, social, or good governance criteria. But they are less demanding than ‘Article 9’ (or dark green), which has a concrete and measurable sustainability objective.
Of those 285 Spanish light green funds, 27% (77 products) include in their names terms such as sustainability, sustainable, ESG, climate change, green, or social expressions such as education or health. And Esma, the European Securities and Markets Authority, has put the spotlight on this type of name, with a consultation open until February 20th on the requirements to be met by EU-domiciled funds that include words such as these in their names. Its aim is to avoid greenwashing: that products that are not green or ESG should not be called green or ESG.
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Minimum criteria for funds to be considered sustainable by Esma
Esma estimates that 9.2% of EU-domiciled ‘Article 8’ funds (2,730 out of a total of 29,701 funds) use such words and are, therefore, “potentially affected by the proposal”. They are joined by a further 534 European products which, despite not having been classified as sustainable, have chosen to place such words in their names. The ‘article 9’ products would not be threatened since, a priori, they comply with the thresholds proposed by Esma.
This Authority intends that, if a fund incorporates these terms, it should meet “minimum criteria”. It proposes that the funds that use the expression ‘ESG’ have at least 80% of assets that “promote ESG characteristics”, that is to say, that favor these issues. Funds whose names include the word Sustainable or Sustainability, more pure and assimilable to dark green, should have at least 50% of that 80% allocated to “sustainable investments”.
“Very relevant compliance issues arise from these guidelines” for ‘Article 8’ funds, warns Marta Olavarría, head of sustainable finance at Auren, “which should comply with the minimum thresholds of promotion or investment proposed by Esma”. You may be interested in: 41 funds go from ‘dark green’ to ‘light green’.
The basic problem is that the definition provided by the Disclosure Regulation itself is imprecise. “The European Supervisory Authorities have insisted to the Commission that it has to define what an Article 8 fund is,” explains Olavarría. Find your sustainable investment fund in the fund comparator.
For their part, both Efama (the European Association of Investment Funds and Asset Management) and Eurosif (the European Sustainable Investment Forum) have expressed their views as part of the public consultation launched by Esma. Both agree that it is necessary to distinguish between the deliberate misrepresentation of the characteristics of a product to mislead the client and unintentional error, which occurs without any real intention to mislead.
Esma’s guidelines are expected to be published in the third quarter of 2023, to be complied with in the fourth quarter for new funds, and to be in place by the third quarter of 2024 for existing products.
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First published in elEconomista.es, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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