ESMA article identifies increase in use of ESG-related language in fund names and documentation

ESMA has published an article exploring the use of language related to ESG factors in EU investment fund names and documentation. Tackling greenwashing is one of the key priorities in ESMA's sustainable finance strategy - ESMA see this report as an important first step in the detection and monitoring of potential greenwashing, particularly "given that greenwashing stems – first and foremost – from misleading, confusing, or inaccurate claims".

With this in mind, ESMA has constructed a comprehensive list (to be refined in the future) of ESG words and phrases, against which the ESG-related language used by funds can be measured and compared. This allows ESMA to to apply natural language processing (NLP) techniques to several large text and numerical datasets spanning funds across the EU. 

Summary of findings

• The share of EU UCITS investment funds with ESG words in their name has increased from less than 3% in 2013 to 14% in 2023.
• Fund managers tend to prefer using generic language (‘ESG’, ‘Sustainable’) rather than more specific ‘E’ or ‘S’ words. This can make it more difficult for investors to verify that the fund portfolio is in line with the name.
• There is supportive 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.
• Funds with ESG-related language in their name provide more extensive ESG disclosures in their investment strategy and KIID/KID than other funds. In addition, the share of ESG words found in the different types of documents is coherent with the SFDR disclosure type (i.e., Article 8 funds use more ESG words than Article 6 funds but fewer than Article 9 funds).
• The findings point to differences between the document types (regulatory document vs. marketing material), suggesting that fund managers adapt their communication strategies to the expected types of readers. ESMA says this highlights the importance of ensuring consistency across different types of documentation. It also highlights the importance of monitoring this type of communication channel, from an investor protection perspective.

Related work

ESMA consider that its findings support, among other things ESMA’s recent public consultation on guidelines to ensure fund names accurately reflect their portfolio from an ESG perspective.  On this related work, we are expecting final guidelines to be published imminently (they would apply 3 months after the translations are published (with a 6 month transitional period for funds launched prior to that date).  

Webinar

ESMA is organising a public webinar on the article and its findings on Wednesday, 18 October 2023 from 10:30 to 11:30 (Paris Time). Interested persons should register by Monday, 16 October 2023 at 12:00 via the following link.

The press release, and ESMA article, published on 2 October 2023 are available here.