Adding an ESG term to the name of a fund has “a significant impact” on fund inflows during the five quarters following the name change, according to the latest study published by the European Securities and Markets Authority (ESMA).
The report – Fund names: ESG-related changes and their impact on investment flows – shows that adding an ESG term can significantly boost fund inflows, especially in the immediate quarter following the name change, with a sustained positive impact in subsequent quarters. However, the impact varies depending on the specific ESG terms used, with environmental-related terms showing the most substantial effect on inflows, highlighting the importance of ensuring that name changes are reflected in portfolio investments.
Inflows were found to increase by 2.2% over the first two-quarters post-name change and, in total, the cumulative increase in inflows over the first year amounted to 8.9%.
The biggest impact of adding ESG terms to fund names is primarily driven by funds incorporating an environmental-related term. The effect on fund flows for this subgroup is significant across all periods, resulting in a cumulative increase (in terms of net inflows) of 16% in the first year compared to funds that did not add such a term to their name.
In contrast, the results for the other two subgroups – social, governance and sustainability-related terms – were largely insignificant across periods, with the sole exception being a significant effect in the fourth quarter for sustainability terms. These results suggest no consistent evidence that adding social, governance or sustainability-related terms leads to significant inflows into a fund.
The report also found that there has been an increase in the use of ESG language in fund names, particularly words relating to the environment.
The findings “demonstrate the strong financial incentives for fund managers to consider adding ESG terms to the names of funds”, the report concluded, highlighting “the importance of the ESMA Guidelines to help protect investors by ensuring that, when a fund name includes ESG language, its portfolio investments are aligned with investors’ ESG preferences”.
Preserving investor trust in green investment products is key to ensuring that the financial system continues to support the transition to a more sustainable economy, the authors added.
Commenting on the study’s findings, Aleksandra Palinska, executive director at Eurosif, said: “The ESMA report demonstrates that investors are interested in investing in a sustainable manner, or at least in ensuring that sustainability risks are integrated into their investments.
“It is also noteworthy that environmental-related terms are linked with the most substantial effect on inflows. This underscores the importance of rules ensuring that fund names and sustainability-related claims adequately reflect the composition of portfolio investments and are not misleading. We hope this will be addressed during the upcoming review of the Sustainable Finance Disclosure Regulation (SFDR).”
James Alexander, CEO of the UK Sustainable Investment and Finance Association (UKSIF), added: “These fascinating ESMA stats would appear to demonstrate the positive benefits of sustainable-labelled funds, particularly for a retail audience. UKSIF polling data shows that 80% of consumers are favourable towards sustainable and responsible investing, and fund flows seem to be following.
“It is important to ensure that sustainability-related terms in fund names are restricted to those funds that are aligned to sustainable investing approaches and truly delivering what a retail consumer would expect. This is why we’re supportive of anti-greenwashing and fund labelling regulations.”
