On 13 December 2024, the European Securities and Markets Authority (ESMA) published answers to frequently asked questions (FAQs) on its Guidelines on funds' names using ESG- or sustainability-related terms (the Guidelines).
As market participants have raised several misunderstandings regarding the Guidelines, this first set of answers provided by ESMA is welcomed by the industry. In these three FAQs, ESMA notably clarifies:
How to apply the exclusions in case of green bonds
Paragraphs 16-18 of the Guidelines require having certain investments excluded from the portfolio of funds with a name using ESG- or sustainability-related terms, referring to the exclusions for the EU Paris-aligned Benchmarks under the Delegated Regulation (EU) 2020/1818 on minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks (the Benchmark Regulation). The question relates to the application of this list of exclusions in case of investments in green bonds and as to whether the screening should be conducted at the level of the issuer or the investments underlying the green bonds.
In that respect, ESMA differentiates between (i) European green bonds issued under Regulation (EU) 2023/2631 of the European Parliament and of the Council of 22 November 2023 on European Green Bonds and optional disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds (the EUGreen Bonds) and (ii) any other green bonds.
ESMA clarifies that the list of investments in paragraphs 16-18 referring to the exclusions for the EU Paris-aligned Benchmarks under the Benchmark Regulation of the Guidelines are not applicable to EU Green Bonds, since the Guidelines must be read in conjunction with the above-mentioned regulation and already apply the high level of protection needed for such investments.
For other green bonds, the exclusions referred to in paragraphs 16-18 of the Guidelines should apply on a look-through basis to the economic activities financed by such instruments, except for companies under Article 12(1)(c) of the Benchmark Regulation (i.e. companies that benchmark administrators find in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises), such companies being always excluded under the exclusions referred to above.
The interpretation of 'meaningful investment' in sustainable investments referred to in Article 2(17) of SFDR
As a reminder, investment funds with a name including a "sustainable"-related term are required, under the Guidelines, to invest 'meaningfully in sustainable investments' defined under Article 2(17) of SFDR1.
ESMA clearly confirms that this requirement is met when at least 50% of the portfolio is made of 'sustainable investments' within the meaning of Article 2(17) SFDR. However, ESMA clarified that the amount may be higher, subject to the circumstances of the case.
The meaning of 'controversial weapons' for the purpose of the exclusions
As part of the exclusion list of the Benchmark Regulation applicable under the Guidelines, the term 'controversial weapons' may be subject to different interpretations.
In absence in any clarification in the Benchmark Regulation, ESMA expects that national competent authorities refer to the list included in the principal adverse impact indicators of the SFDR RTS2 (i.e. anti-personnel mines, cluster munitions, chemical weapons and biological weapons).
Footnotes
1 Art 2(17) of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (SFDR) according to which 'sustainable investment' means an investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its impact on biodiversity and the circular economy, or an investment in an economic activity that contributes to a social objective, in particular an investment that contributes to tackling inequality or that fosters social cohesion, social integration and labour relations, or an investment in human capital or economically or socially disadvantaged communities, provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance
2 Commission Delegated Regulation (EU) 2022/1288
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