The European Securities and Markets Authority (ESMA) has published a trends, risks and vulnerabilities (TRV) risk analysis
report on ESG-related changes to fund names and their impact on investment flows. The report examines whether the fund managers decision to incorporate environmental, social, governance or sustainability-related (ESG) terms into their funds' names leads to more investor interest. If so, this has the potential to incentivise greenwashing behaviour, undermine investor trust and hinder efforts to promote sustainability within EU financial markets.
In the report, ESMA:
- Analyses the evolution of ESG names among EU-domiciled investment funds, including UCITS and alternative investment funds (AIFs), since 2009. Its findings show that the proportion of funds with ESG-related names rose significantly from less than 3% before 2015, to around 9% by mid-2024. This was mainly driven by UCITS funds, where 15% had ESG-related names by mid-2024.The terminology also evolved from a variety of unique terms to more standardised ones like 'ESG', which now make up over 40% of all ESG-related terms added post-2021 by UCITS and AIFs.
- Examines the effect of adding an ESG name on investor inflows. The findings show that doing this can significantly increase fund inflows, particularly in the quarter immediately following the name change, with a positive impact maintained in subsequent quarters. However, the impact varies based on the specific ESG terms used, with environment-related terms showing the most substantial impact on inflows. This underscores the importance of aligning name changes with portfolio investments.
ESMA's findings demonstrate strong financial incentives for fund managers adding ESG terms to the names of funds. It highlights the importance of ESMA's guidelines, ensuring that when a fund name includes ESG language, its portfolio investments are in fact aligned with investors' ESG preferences. ESMA will continue to monitor fund market trends and the impact of its guidelines on funds' names using ESG or sustainability-related terms.
