With a burgeoning interest in sustainable investment, the European Securities and Markets Authority (ESMA) has turned its attention towards the use of generic Environment, Social, and Governance (ESG) terms in the naming of European Union (EU) funds. The aim is to examine the authenticity of the claims being made by these funds in relation to their adherence to the principles of ESG investment.
In its recent risk analysis report published on October 12, 2021, ESMA made use of natural language processing (NLP) techniques to examine the names of more than 36,000 funds valued at a combined total of €16 trillion. Also considered were a dataset of over 100,000 fund documents. This painstaking analysis revealed an interesting trend; currently 14% of Undertakings for the Collective Investment in Transferable Securities (UCITS) have “ESG” in their name. This marks a significant rise from just 3% back in 2013, as unveiled in the report ‘Names and Claims – ESMA probes use of generic ESG terms in EU funds’.
ESMA’s decision to probe this area comes as a response to the stark rise in ESG-labelled funds and the perceived need for greater transparency regarding the use of ESG nomenclature in financial products. The ever-increasing demand for sustainable investment options has led to a corresponding increase in the number of funds purporting to offer such opportunities. However, without a clear regulatory framework, there is the potential for lack of transparency and possible greenwashing. The aim of ESMA’s analysis is to contribute towards improving transparency in this burgeoning investment area and upholding investor trust.
This investigation by ESMA forms part of a broader push for more stringent ESG regulation within the financial sector, both in Europe and globally. Several initiatives are already underway, including the EU’s Taxonomy Regulation and Disclosure Regulation, which are aimed at providing guidelines on sustainable economic activity and enforcing transparency in the explication of financial product’s sustainability. These regulations, paired with ESMA’s investigation, notably demonstrate the continuing evolution of the regulatory landscape to encompass and support sustainable finance.