The European Fund and Asset Management Association (Efama) has recommended the European Securities and Markets Authority (Esma) delay its upcoming ESG fund-naming guidance.

Under current plans, quantitative thresholds will be used as thresholds for fund names.

But EFAMA members have concerns about the proposed numerical threshold approach as it may not address the underlying greenwashing issues the industry is facing due to the “current lack of clarity on many key sustainable finance concepts.”

ESMA’s proposals are centred on funds employing ESG-related naming terms, allocating a minimum of 80% of investments to Sustainable Finance Disclosure Regulations (SFDR) designated characteristics.

Funds with sustainability-related names must allocate a minimum of 50% within that 80% to sustainable investments.

EFAMA is in favour of setting common rules to avoid misleading information and to enhance trust and clarity in the market, especially in the fast-evolving ESG landscape.

“However, we suggest that ESMA delays [its] proposed guidelines until the lack of clarity on what constitutes a ‘sustainable investment’ is rectified and they have worked together with the European Commission to resolve interoperability issues between the guidelines and SFDR, MiFID/IDD etc.,” the body said in a statement.

Should current proposals go ahead, there will be several important elements that need to be addressed, noted EFAMA.

The comments follow an ESMA consultation on guidelines on funds’ names using ESG or sustainability-related terms.

It has proposed a number of changes to address these issues.

Notably, cash, cash equivalents, and derivatives used for hedging should be excluded from an 80% ratio calculation to allow for efficient fund management, especially during extraordinary market circumstances.

And the lack of clarity on what exactly qualifies as a sustainable investment under SFDR calls into question the appropriateness of a separate threshold of 50%, ESMA suggested.

Anyve Arakelijan, regulatory policy adviser at EFAMA, said: “It is unlikely that a methodology built on an unclear legal definition will increase investor understanding of ESG funds and adequately address greenwashing concerns.

“Rather than imposing a threshold, it would be more proportionate to mirror ESMA’s supervisory guidance on sustainability risks and disclosures by ensuring that the use of ESG-related terms is supported in a material way with sufficient evidence of sustainability characteristics in the fund’s investment objectives and strategy,” he said.

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