ESG Funds: Nomenclature, Regulation and New Perspectives

The official ESMA document, Final Report – Guidelines on funds’ names, highlights that from 2015 to the second quarter of 2024, the percentage of funds that include ESG terms in their name increased from 3% to 9%, with UCITS funds reaching 15%. This trend reflects a growing investor focus on sustainability and a response to emerging regulations. However, starting from mid-2021, this trend has slowed, hindered by increasing regulatory concerns over the risk of greenwashing. According to ESMA, funds with ESG nomenclature report an average flow increase of 8.9% in the first year. The effect is even more pronounced for funds using environment-related terms, with a 16% increase. However, the positive effect is not as evident for terms related to social or governance aspects.

Over time, the ESG terminology in fund names has evolved towards greater standardization. After 2021, over 40% of the added words related to ESG themes are represented by the standardized term “ESG”. The terms have been classified into three main categories: Social/Governance, Environmental/Impact and Sustainability-related. Opinions remain divided on the introduction of quantitative thresholds for the use of ESG terms in fund names. Many stakeholders, including the SMSG, recognize the need to combat greenwashing but raise doubts about the effectiveness of numerical parameters in the absence of standardized data from the CSRD and the future ESAP platform.

Some fear that, in an already complex regulatory framework, the introduction of such thresholds may generate further confusion. Others, while supportive, consider their usefulness conditional upon the clear definition of ESG terminology and a transparent methodology for including liquidity and derivatives. ESMA, while aware of the raised concerns, considers the adoption of at least a clear and simple quantitative threshold essential to ensure consistency between the substance of the fund and its name. It also highlights that any legislative reforms, such as those foreseen by the SFDR, could take years, while the risks of greenwashing need to be addressed immediately. Meanwhile, some national authorities have already adopted stricter provisions.

Between 2019 and 2021, there was a sustained growth in funds adding ESG terms to their names. However, starting in 2022, there has been an increase in funds beginning to remove or replace those terms, likely in response to increased scrutiny from regulators and the risk of greenwashing. ESMA has published specific guidelines on ESG naming, effective from May 21, 2025, to ensure that the fund's name consistently reflects the underlying investment strategy. This dynamic reflects an evolution in the perception of the term 'sustainable', increasingly replaced by more specific and standardized expressions.

The new ESMA guidelines establish that to use ESG terms in fund names, at least 80% of investments must meet environmental or social characteristics. For funds whose name contains the word "sustainable," a commitment to make a significant level of sustainable investment is required. There are also specific exclusion criteria for terms like "environmental," "impact," "transition," "social," and "governance." The guidelines will come into effect on November 21, 2024, with a six-month transition period for existing funds to comply. For more details, see the article: ESMA Guidelines: The Future of Sustainable Finance

This article was created as part of the project "Biodiversity services EU expansion" (CUP: E43D22000480009) under the call of the Lombardy Region "PR FESR 2021-2027 – INTERNATIONALIZATION LINE 21-27", aimed at supporting the internationalization of Italian companies. 3Bee is the naturetech company that develops innovative technologies for the monitoring, protection, and regeneration of biodiversity, supporting companies in defining personalized climate strategies based on the analysis of their impacts and dependencies on nature. With an established portfolio in Italy, Germany, and France and important partnerships, 3Bee continues its expansion in international markets to create a concrete impact through technology.