The market had been expecting feedback by now from the European Securities and Markets Authority (ESMA) regarding its November 2022 consultation on its guidelines on funds' names using ESG or sustainability-related terms (Guidelines).
It is therefore unsurprising that, given the Guidelines' broad impact, as we discuss below, ESMA confirmed, by way of a short statement on 14 December, that it had postponed adoption of the Guidelines until the Alternative Investment Fund Managers Directive (AIFMD) II is published, which we expect around Q2 2024. The Guidelines will apply three months after their date of publication.
Managers of existing funds will have a six-month period in which to comply. The Guidelines will apply to new funds immediately.
In addition to the statement on the Guidelines, on 4 December ESMA and the other European Supervisory Authorities (ESAs) published their final report in response to the April 2023 consultation on proposed changes to the Sustainable Finance Disclosure Regulation (SFDR) Level 2 measures. We note these below.
Why Are the Guidelines Important?
The Guidelines are intended to tackle greenwashing risk in funds, by using quantitative thresholds for the use of ESG and sustainability-related terminology in fund names. This is to ensure, in turn, that marketing communications are fair, clear, and not misleading and that fund managers are acting honestly. They will be relevant both for:
- the European Commission (Commission) consultation on a possible SFDR II (which we wrote on in The Seeds for SFDR II? Two EU Commission Consultations) – this covers marketing communications, product names, and whether or not the SFDR should include additional rules on labelling and marketing communications; and
- the review of AIFMD, which we recently wrote on in AIFMD II (Near) Final Text Agreed: What's New? – the AIFMD II will require ESMA is to develop guidelines on AIF names and circumstances where the name of an AIF could be unfair, unclear or misleading.
The Good and Less Good Aspects of the ESMA Statement
ESMA has accepted some industry feedback on the Guidelines and made changes to the version on which it consulted, as set out below. Although ESMA has not made the text of the revisions available, ESMA's comments on the changes are welcome: the Guidelines will apparently permit funds to have transitional strategies and will better recognise fossil fuel exclusions.
It is still a shame that ESMA has not commented on some other threshold points that the industry raised in response to the November 2022 consultation. We still do not know if, for example, the Guidelines are optional for funds intended for professional investors only. Nor whether or not funds that are closed for marketing will be exempt.
Proposals in the Consultation vs Expected Outcomes in the Statement
| Consultation proposals | Statement outcomes |
| If a fund has the word "sustainable" or any derivation of it in its name, a minimum of 50% of the overall investments should be sustainable investments, as defined in Article 2(17) SFDR |
A fund with a sustainability-related term in its name should:
|
| No recognition of funds that pursue strategies fostering a path to transition to a greener economy |
A new category for 'transition'-related terms to accommodate funds using terms in their names. Such a fund should apply a minimum proportion of at least 80% of its investments that are aligned with the EU Climate Transition Benchmarks, including where used in combination with ESG terms. This category cannot apply where a fund uses sustainable terms in its name (because sustainability features are then expected, irrespective of any other terms used). |
| No measurability of impact and transition terms | Fund with a 'transition' or 'impact'-related term in its name should ensure that a minimum proportion of investments are made with the intention of generating positive, measurable E or S impact alongside a financial return or that they are on a clear and measurable path to E or S transition. |
Comparing the Guidelines With Other Regimes
The policy underpinning the Guidelines reflect current developments in places such as the UK and the US and the rules and proposed rules governing fund names as discussed in our recent alert. Managers with investors in the EU will need to consider their impact alongside the other rules.
The comparison with the UK rules published in the recent Financial Conduct Authority (FCA) policy statement PS23/16, in particular, is worth noting. As we discussed in our recent alert, a UK manager will only be allowed to use a sustainability term in a fund's name if it has E or S characteristics (with reference to a minimum of 70% of its investments have these characteristics). It cannot use 'sustainable,' 'sustainability' or 'impact' unless using the 'Sustainability Impact' label. A more general point of potential difference is that many of the rules on labels under the UK regime will only apply to communications and disclosure to retail investors: as noted above, it is still unclear whether the restrictions in the Guidelines will apply to communications to professional investors or be limited to retail investors.
The FCA indicated in PS23/16 that the rules will be extended to non-UK AIFs and AIFMs (as well as portfolio managers).
The ESA Report and Changes to the SFDR
We noted the proposals for changes to the SFDR Level 2 measures in ESAs propose adjustments to the EU SFDR rules. The final report published on 4 December contains the responses to its April 2023 consultation.
Together with the proposed amendments to the disclosure templates, the ESAs propose further technical revisions to the SFDR, including additional disclosures for 'sustainable investments' and PAI indicators, for financial products with underlying investment options and for GHG emission reduction targets.
The Commission has three months to review and decide how to proceed (and indeed whether or not further consultation is needed). This exercise appears to be taking place separately to the SFDR overview consultations that closed on 15 December 2023, and could lead to significant changes to the current disclosure framework.
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.
