Funds using more generic ESG lingo

The investment fund sector is increasingly using ESG-related words in fund names, marketing and regulatory filings, but they often rely on vague terminology, according to new research.

The European Securities and Markets Authority (ESMA) published a report examining the industry’s reliance on ESG terms in fund names and documentation, saying that an “assessment of how investment funds signal themselves is an important first step in the detection and monitoring of potential greenwashing.”

The research — which used natural language processing to examine more than 100,000 fund documents — found that the share of investment funds with ESG words in their name has increased from less than 3% in 2013 to 14% in 2023. Since mid-2017, many funds changed their names to add ESG words, it noted.

However, the report said “fund managers tend to prefer using generic language rather than more specific words. This can make it more difficult for investors to verify that the fund portfolio is in line with the name.”

Additionally, the report noted differences in language usage in regulatory filings versus marketing materials.

“We find evidence of the fund industry adapting its ESG communication depending on the type of document — regulated or unregulated. Our findings support recent efforts by policymakers to ensure that EU funds’ names and disclosures accurately reflect their activities,” it said.

Looking ahead, ESMA said it will “scale up the monitoring and supervision of greenwashing.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.