A regular briefing for the alternative asset management industry.
The EU may have blazed the trail in sustainability regulation, but European policymakers and regulators show no signs of relenting in their mission to stamp out "greenwashing". In financial markets there is a continuing concern that investors are being misled by firms that overstate the green credentials of their investment products.
While regulatory scrutiny and enforcement action are likely to increase, the European Commission has also acknowledged that a lack of clarity in the Sustainable Finance Disclosure Regime (SFDR) – a disclosure regime that is being used by many investors as a proxy for a labelling regime – itself "creates opportunities for greenwashing". In a recent speech, the Financial Services Commissioner confirmed that a consultation on the operation of the SFDR will be launched next year – only a few months after the detailed implementing rules become effective. That consultation will follow hard on the heels of, and will no doubt be informed by, a call for evidence on greenwashing that was launched in November by European supervisors. Industry responses to those requests for input will be vital, and it is particularly important that those running private funds make their voices heard.
In the meantime, Commissioner McGuinness has also repeated a pledge to publish "Q&As" on the SFDR to clarify how some of its most fundamental concepts should be understood. These are promised "early next year", approximately two years after the legislation first became effective. They follow "clarifications" on the SFDR secondary legislation, rules that are effective from January, published by the three pan-EU supervisors last month.
Even if those clarifications bring some relief to the market, this legislation by executive "guidance" is hardly ideal. But it is an approach that is evident in a consultation on fund names – also focused on greenwashing, and also launched in November (a busy month for anyone trying to keep up with European sustainability rules).
In summary, the consultation published by ESMA, the European Securities and Markets Authority, seeks comments on draft guidelines on the use of environmental, social or governance (ESG), or sustainability-related, terms in fund names. The effect is that use of such terms has an ongoing impact on portfolio composition and the fund's investible universe. (Our detailed briefing is here.)
Whether ESMA has the power to issue such "guidelines" in the absence of primary legislation on fund names is a matter for debate. ESMA justifies its intervention as elaborating on an EU asset manager's legal obligations to act honestly and fairly and to ensure that marketing communications are "fair, clear and not misleading". The guidelines would build on previous principles-based guidance on fund names issued in May 2022, but it is clear that ESMA's power to issue guidance does not give it the right to create new legal obligations for firms. These guidelines, which will apply to national regulators on a "comply or explain" basis, would, in effect, create new rules which would bind regulated EU firms.
That important concern might be less worrisome if the guidelines were less far-reaching and more clearly articulated.
But as well as being far-reaching, the guidelines are also vague – which would add to uncertainty in the market.