(Bloomberg) -- Japan’s financial regulator says it suspects “more than a few cases” of greenwashing by asset managers running ESG portfolios and will take “regulatory action against malicious cases,” Hideki Takada, director at the Financial Services Agency, said in an interview.

After a review was sparked in part by the $9 billion Mizuho Financial fund that failed to offer investors enough information about its environmental impact, the FSA has set new limits on which funds can label themselves “ESG.” 

The new rules address “grave concerns” about mislabeling by some financial services firms that are pitching funds focused on environmental, social and governance issues, Takada said.

Under the FSA’s new guidelines, only funds that consider ESG as a “key factor” when choosing investments can be marketed as such. Starting in April, new funds that don’t fall into that category can’t use ESG-related terms such as “green,” “decarbonization” or “sustainable” in their names. Existing funds can retain their names but will have to state in their prospectuses they aren’t ESG funds.

The labeling changes could affect as much as $1.8 billion in assets or almost 7% of existing funds with ESG-related keywords in their names, according to Bloomberg analysis of data from Morningstar Inc.

Takada rejected the European Union’s “strict” labeling rules, which sort ESG funds into defined categories known as Articles 8 and 9. Setting such a narrow definition of ESG is too difficult in a rapidly evolving field, he said.

Instead, Japan will take a principles-based approach, weeding out sham funds through market forces and greater disclosure and taking regulatory action against the worst offenders, he said.

Japan’s decision mirrors the approach taken by other Asian regulators, including India with its true-to-label guidelines for ESG funds issued last month. It comes amid tumult in Europe’s sustainable investing market, and growing criticism of the continent’s ESG rules from regulators and fund managers alike.

Japan also doesn’t intend to introduce a European-style taxonomy defining green and non-green activities, Takada added.

“ESG is a very wide and evolving concept” with “differing views” on natural gas and nuclear energy, he said.

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