On 13 December 2024, ESMA published three new questions and answers ("Q&As") which provide welcome clarification on the application of some key elements of its Guidelines on funds' names using ESG or sustainability-related terms (the "Guidelines").
The new Q&As address:
- compliance with PAB/CTB exclusion criteria (defined below) in the context of green bonds and other use of proceeds instruments [UCITS ID2368, AIF ID 2370];
- the interpretation of "meaningfully investing" in sustainable investments for funds which use a sustainability-related term in their name [UCITS 2373, AIF 2374]; and
- the definition of the term "controversial weapons" [UCITS 2371, AIF 2372].
The objective of each of the Q&As is to ensure a smooth
application of the Guidelines through common understanding of key
concepts.
We have set out some further detail on each of the new Q&As
below.
Background
The Guidelines, published on 21 August 2024, set out specific conditions which must be adhered to by funds using ESG or sustainability-related terms in their names. The objective of the Guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names. The Guidelines apply immediately to any funds established on or after 21 November 2024 while funds established prior to that date must comply with the Guidelines by the end of the 6-month transition period, 21 May 2025.
Please refer to our separate briefing for a more detailed overview of the key provisions of the Guidelines and of the Central Bank of Ireland's streamlined filing process for documentation updates.
Applicability of PAB/CTB criteria to Green bonds/Use of Proceeds Bonds
In the first of its new Q&As, ESMA helpfully clarifies that an assessment against the exclusion criteria applicable to either EU Paris-Aligned Benchmarks or EU Climate Transition Benchmarks (together, the "PAB/CTB exclusion criteria") can be carried out on a look through basis with respect to the specific investment held by the relevant fund product and does not need to be performed with respect to the issuer itself. The look-through approach should determine that the instrument invested in does not finance any of the excluded activities. However, the look through approach cannot be adopted with respect to investments in companies found to be in violation of the UN Global Compact principles or OECD Guidelines for Multinational Enterprises excluded under Article 12(1)(c) of Commission Delegated Regulation (EU) 2020/1818. This clarification will be welcomed by managers of funds investing in use of proceeds instruments such as green bonds not issued under the European Green Bonds Regulation.
ESMA has also confirmed that in-scope funds do not need to comply with the PAB/CTB exclusion criteria in the context of European Green Bonds issued under the European Green Bonds Regulation (Regulation (EU) 2023/2631). ESMA has clarified that this is on the basis that the Guidelines are intended to be read in conjunction with other legislative provisions such as the European Green Bonds Regulation and should take the high level of protection guaranteed by the EU legal framework for such investments into account.
"Meaningfully" investing in sustainable investments
In its consultation paper on the draft Guidelines
(November 2022), ESMA had previously suggested that a threshold of
at least 50% of sustainable investments (referred to in Article
2(17) of Regulation (EU) 2019/2088 SFDR) was appropriate for funds
using the word "sustainable" or any other
sustainability-related terms in their name. However, following
feedback received from industry stakeholders, ESMA replaced the
minimum 50% threshold with the concept of "meaningful
investment" in its final Guidelines.
In its second new Q&A, ESMA has now clarified that national
competent authorities ("NCAs") may find
that funds are not "meaningfully" invested if less than
50% of their investments are in sustainable investments. While
appearing to set a minimum threshold for "meaningful"
investment in sustainable investments, this Q&A does allow NCAs
to impose a higher threshold. At the same time the Q&A does not
expressly provide that investment in sustainable investments of
less than 50% will not be "meaningful" and intimates that
a case-by-case assessment of specific circumstances is permitted.
While this Q&A does provide additional clarity for
"meaningful" investment in sustainable investments,
managers will be vigilant to see how NCAs interpret this guideline
and to what extent the 50% threshold will be adhered to in
practice.
Controversial weapons
Finally, in its third new Q&A, ESMA clarifies that for the purposes of applying the exclusions referenced in paragraphs 16-18 of the Guidelines related to Article 12(1)(a) of Commission Delegated Regulation (EU) 2020/1818 (companies involved in any activities related to controversial weapons), NCAs can refer to the list of controversial weapons provided in indicator 14 of Table 1 of Annex I of Commission Delegated Regulation (EU) 2022/1288). Therefore, the term 'controversial weapons' should be interpreted as including anti-personnel mines, cluster munitions, chemical weapons and biological weapons.
Conclusion
Since their publication in August 2024, the Guidelines have been the subject of significant discussion amongst industry stakeholders. ESMA's Q&As therefore provide a welcome clarification on the application of some key aspects of the Guidelines. It remains to be seen, however, whether the Q&As go far enough to ensure a consistent application of the Guidelines by NCAs throughout the EU.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
