On 21 October 2024, the Commission de Surveillance du Secteur Financier (CSSF) issued Circular 24/863, (the "Circular") which addresses the use of Environmental, Social, and Governance (ESG) and sustainability-related terms in fund names. This follows the European Securities and Market Authority's (ESMA) guidelines (Ref. ESMA34-1592494965-657) and applies to all UCITS, Alternative Investment Funds (AIFs), and other regulated funds such as EuVECA, EuSEF, ELTIF, and money market funds (MMF) (the "Guidelines").
The Circular emphasizes the need for clarity, fairness, and accuracy in the naming of investment funds using ESG or sustainability-related terms, which comes into force on 21 November 2024. For existing funds, a six-month transition period applies, with a final compliance deadline of 21 May 2025.
Purpose of the guidelines
The primary goal of the Guidelines is to ensure that fund names using ESG or sustainability-related terms are clear, fair, and non-misleading. This is critical as a fund's name is a fundamental marketing tool and often the first point of interaction for potential investors.
Scope of application
The Circular applies to a broad range of market participants, including:
- UCITS management companies and self-managed UCITS;
- Alternative Investment Fund Managers (AIFMs), including internally managed AIFs; and
- Managers of EuVECA, EuSEF, ELTIF, and money market funds.
The Guidelines require compliance with UCITS and AIFMD rules on fair, clear, and non-misleading marketing communications. This applies to all fund documentation aimed at investors.
Threshold requirements for ESG or sustainability terms
The Guidelines implemented by the Circular introduce strict quantitative thresholds for the use of ESG or sustainability-related terms in fund names. Funds must ensure that at least 80% of investments align with the environmental, social, or sustainability objectives mentioned in their investment strategies and these investments should be disclosed as binding elements in pre-contractual and periodic reports, as required by Commission Delegated Regulation (EU) 2022/1288.
Moreover, specific exclusions are applicable, particularly concerning companies operating in controversial sectors. This includes, for example, companies engaged in activities related to controversial weapons, the cultivation and production of tobacco, among others, as outlined in Article 12 of Commission Delegated Regulation (EU) 2020/1818.
Guidance for different types of terms
The Circular provides detailed guidance on the types of terms that may be used in fund names:
- Environmental: Terms like "green," "climate," and "environmental" must meet the 80% investment threshold.
- Social: Terms like "equality" or "social" must similarly align with the investment criteria.
- Governance: Terms linked to governance should accurately reflect a significant portion of the fund's investment focus.
- Sustainability: Use of this term requires meaningful commitments to sustainable investments, as defined under Article 2(17) of the SFDR.
Supervisory expectations
Competent authorities, including the CSSF, will actively supervise compliance throughout the fund's lifecycle. Any deviation from these requirements must be promptly corrected in the investors' best interest. Misleading fund names or those that fail to meet the required thresholds may trigger further investigation and regulatory actions.
Implementation Timeline
- New funds: Full compliance with the Guidelines is mandatory as of 21 November 2024.
- Existing funds: A six-month transition period applies, with a final compliance deadline by 21 May 2025.
With the introduction of CSSF Circular 24/863, Luxembourg-based fund managers must carefully review their existing and future fund names to ensure alignment with the ESMA Guidelines. The CSSF's adoption of these guidelines underscores the increasing regulatory focus on transparency and accuracy in ESG disclosures, reflecting broader European trends in sustainable finance regulation.
Fund managers should take immediate action to assess compliance and adapt their marketing materials and fund documentation accordingly.
Feel free to contact our Investment Management team for more information on how this Circular may impact your fund management activities.
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.
