Following numerous initiatives in the ESG field at the EU level, in November 2022, ESMA published its Consultation paper on Guidelines on funds' names, with the intention of seeking feedback from market players on the potential implementation of minimum criteria for funds using ESG related terms in their names. Fund managers already had to comply with sectoral legislation, requiring that information in marketing documents have to be clear, fair and not misleading. Amidst rising concerns about greenwashing practices, the proposed rules are intended to provide further guidance to asset managers in the selection of fund names, and in particular to provide assets managers particularly by offering clear and measurable criteria for the use of ESG or sustainability-related terms in fund names.
On 14 May 2024, after considering feedback received to the consultation paper, ESMA published its final report on guidelines for fund names. The guidelines will apply three months after the date of their publication on ESMA's website in all EU official languages and will immediately become applicable to funds launched after that date, whereas existing funds will benefit from a six-month transition period following the guidelines' entry into force.
What do fund managers using ESG-, sustainability-, transition- and impact related words in their fund names have to consider in the near future?
Funds that use any of these terms or terms that are derived from them must allocate at least 80% of their investments to environmental or social characteristics or sustainable investment objectives in accordance with their investment strategy.
In addition to the 80% threshold, funds that use social-, governance-, or transition-related words in their names must apply the Climate Transition Benchmark (CTB) exclusion criteria. These criteria do not include fossil fuel exclusions and thus do not penalize funds that focus primarily on social, governance or exclusion strategies. However, funds using environmental or impact related terms in their names are required to apply the Paris-aligned Benchmark (PAB) exclusion criteria, which do include fossil fuel exclusions.
Sustainability related words in fund names entail the most stringent requirements, as these funds must (i) respect the 80% minimum proportion, (ii) apply the PAB exclusion criteria and (iii) meaningfully invest in sustainable investments, as defined under Article 2 (17) of the SFDR. This means that only Article 8+, Article 9 and Taxonomy-aligned funds could be allowed to use sustainability related terms in their names.
It is therefore important for fund managers to have a closer look at the ESMA guidelines in order to ensure compliance.
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