Navigating ESG Regulatory Shifts in the U.S. and Beyond: Key Updates and Actionable Insights

As we navigate the complex terrain of Environmental, Social, and Governance (ESG) regulations, asset managers operating in the U.S. and global jurisdictions face mounting challenges. With the U.S. Securities and Exchange Commission (SEC) implementing stricter compliance measures and international regulators like the European Securities and Markets Authority (ESMA) leading the charge against greenwashing, it is essential for firms to remain proactive in their strategies.

ESMA Finalized Guidelines on ESG Fund Names

In keeping with the global regulatory trend to mitigate greenwashing risks, the European Securities and Markets Authority (ESMA) published its final naming guidelines, requiring funds to meet an 80% threshold for investments tied to ESG-related terms, i.e., 80% of assets must be used to meet the ESG characteristics or sustainable investment objectives set forth in the investment strategy.

Funds with an Environmental, Impact, or Sustainable-related name (or derivations of those) are further mandated to exclude firms who obtain more than 1% of revenues from coal, 10% from oil, or 50% from gaseous fuels in accordance with the Paris-Aligned Benchmark (PAB) standards.

4,790 funds with over EUR 2 trillion in assets under management are expected to comply with the new rules by November 21, 2024. Existing funds have an added six-month grace period to change the name or make the necessary divestments for compliance.

The ESMA guidelines are comparable to the Names Rule, which the SEC finalized in Q4 2023; U.S. firms with greater than $1 billion in AUM have until December 2025 to comply.

Next Steps

U.S. firms should continue to review high-risk areas for greenwashing as identified by ESMA and the SEC, including ESG labels and pledges, promised strategy, objectives, and characteristics, among others. They should exercise caution with the use of ESG language in external marketing while adapting governance structures and internal processes to mitigate greenwashing risks.

Looking Ahead

In our next edition, we will look at the outcome of the U.S. election and the implications for the ESG regulatory landscape in the U.S.

If you are an asset manager or owner with exposure to global sustainability regulation and would like to share your perspectives ahead of our next edition, we would love to hear from you! Please reach out to arrange a discussion and explore how Alpha can support your ESG and sustainability goals.

Stay tuned for more insights.