The share of investment funds in Europe that use ESG-related terms in their names has increased more than four times over the past decade, according to a new study by the European market regulator, the European Securities and Markets Authority (ESMA). fund managers launched new ESG-related products and changed fund names to include sustainability-related terms.
The research also found that fund providers prefer more generic ESG terms, which could make it difficult for investors to verify that investments align with the names of the funds, and that some fund documents aimed at retail investors are more likely to include ESG claims that are aimed at institutional investors.
The research is part of ESMA’s monitoring efforts on greenwashing in the investment management sector. The regulator last year released a sustainable finance roadmap that included tackling greenwashing as a top priority, and also recently launched a consultation for proposed rules on the use of ESG or sustainability-related terms in the names of investment funds.
ESMA’s investigation, and its focus on greenwashing in the fund management industry, comes at a time when regulators worldwide are taking steps to address issues related to the proliferation of investment products and services marketed using terms such as ‘ESG ‘, ‘green’ or ‘sustainable’, without clear rules communicating to investors the actual ESG-related characteristics, methodologies and criteria taken into account in the funds.
The report noted that global assets of sustainable funds have tripled over the past three years to over €2.1 trillion, and found that demand for funds in the EU with ESG-related terms in their names is driving demand for other funds consistently exceeded in every quarter throughout the period. past six years.
In the report, ESMA states:
“It is imperative that ESG investment products are attractive to investors, given the enormous financial resources that will be required to finance the transition to a greener economy… But all else being equal, strong investor demand for ESG products is driving also the greenwashing behavior of assets. administrators.”
Over the past decade, ESMA has found that funds with ESG-related terms in their names have risen to 14% of assets under management in the EU by 2023, up from just 3% in 2013, and now have €974 billion of total assets reaches. a total of €6.8 trillion in assets under management. The increase accelerated in 2016, following the 2015 Paris Agreement, and became ‘exponentially positive’ from 2018 to the end of 2022, although the development of new ESG investment products has slowed in 2023.
In addition to the development of new funds, many products have changed their names to use sustainability-related terms: 1,356 funds, representing 4.6% of EU-based actively managed equity, bond and mixed asset funds, have since added ESG language to their name added. 2018, with particularly sharp growth in 2021 and 2022.
The research shows that the vast majority of funds that have chosen to include ESG language in their names have used more generic ESG-related words, such as ‘ESG’ or ‘sustainable’, although it was noted that there is of an increase in the use of ESG terms. more specific environmental words since 2019. While ESMA noted that more generic terms would allow fund managers to be more flexible in asset allocation and focus on a more diversified portfolio, it also said investors would be able to more easily verify that the fund’s investments are appropriately proportioned. line with the name if the terms used were more specific.
Applying natural language processing (NLP) techniques to assess more than 100,000 fund documents, the ESMA study found that funds sold to retail investors are associated with more ESG claims in their standardized documents, such as Key Investor Information Documents (KIIDs) and Key Information Documents. (KIDs) compared to funds sold to institutional investors, although this difference was not reflected in the investment strategy or marketing materials. ESMA noted that this “underlines the importance of monitoring these types of communication channels, from an investor protection perspective.”
“The transition to a greener economy will require significant financial resources. Meeting these investment needs will require extensive private capital. To ensure that ESG investment products remain attractive, it is crucial that investors can trust that the sustainable financial products offered to them are accurately described.”
click here to access the report.