The EACB has provided its feedback to the ESMA's consultation on the setting up of guidelines proposing quantitative thresholds criteria for the use of ESG- (environmental, social, and governance) and sustainability-related terminology in the names of UCITS (Undertakings for Collective Investment in Transferable Securities) and Alternative Investment Funds (AIFs), to combat the risk of greenwashing.
Co-operative banks inherently consider the value of proximity to the real economy of the EU’s countries, regions, localities and communities by way of financing SMEs and families, which helps maintain a lively and sustainable community-focused society. This is important when considering the importance of co-operative banks in the communication channel with clients, even though it is normally the product manufacturers that would be involved in the naming of the funds. That said, even if the communication from co-operative banks is done in good faith and without any gross negligence, the banks are still open to risk of misleading ESG and/or sustainability claims. In this context, the EACB does sees merit in standardising the concepts that investors first look at when deciding whether to invest in ESG/sustainable funds (e.g. the fund names seem to be a first port of call for investors), but there are general reservations with the proposition being made for guidelines by ESMA which we address below:
Underlying definitions: The EACB finds that introducing quantitative minimum thresholds for the proportion of investments sufficient to support sustainability- and ESG-related terms in funds' names would be premature, bbecause sustainability and ESG characteristics are not clearly defined in EU law and these concepts also vary across Member States. Before introducing quantitative minimum thresholds in this regard, the Sustainable Finance Disclosures Regulation (SFDR) should be revised and these concepts duly standardized. ESMA should also expressively advise National Competent Authorities (NCAs) to abstain from adapting, adding, and supplementing any guidance already set by the ESAs.
Contradictions: Apart from definitional ambiguity, the present guidelines suffer several internal contradictions that we anticipate could thwart their objective. First, while ESMA argues that the thresholds should be upheld "at all times" during the product life cycle, the SFDR, to which they are linked, posits that they should be specified "in accordance with the binding elements of the investment strategy". To accommodate for variation in a product's ability to meet the present minimum commitments, we believe it should be conditional on certain events (such asthe expiration of a denied start-up phase). Second, it is entirely unclear how the minimum safeguards that ESMA presumes connect to the remaining portfolio assets after the 80% threshold for ESG and impact-related naming is set, given that SFDR does not provide for such minimum safeguards criteria. Before any threshold can be effectively set, these discrepancies have to also be addressed.
Thresholds: We consider the 80% threshold for ESG and impact-related terms and the 50% threshold for sustainability-related terms too high. An 80% minimum across all fund types and circumstances will excessively restrict the room for liquidity management and hedging, unreasonably driving up liquidity requirements. A 50% minimum will likely be too high for most investment strategies that are suitable for retail investors such as broadly diversified equity funds, failing to reach the most vulnerable consumers. Therefore, we suggest that thresholds should be lowered and introduced gradually.
Please download our position paper for our more detailed comments further to the above.