ESMA updates guidelines on funds’ names using ESG or related terms

What's new?

On 14 December 2023, ESMA published a statement updating its plans for the adoption of Guidelines on funds' names using ESG or sustainability-related terms (Guidelines).

While the scope of the Guidelines remains unchanged, ESMA has introduced:

• revised thresholds for sustainable investments;
• a new category for transition-related terms;
• separation of "E" from "S" and "G" terms; and
• measurability of impact and transition terms.

Background

On 18 November 2022, ESMA launched a consultation on Guidelines on funds' names using ESG or sustainability-related terms (CP), on which we reported here. Since then, ESMA has considered the feedback received from stakeholders as well as the outcome of the AIFMD 2.0 and UCITS Directive reviews. The agreed amendments to the Guidelines are set out below.

What has ESMA proposed in its new Guidelines?

Threshold for sustainable investments

• ESMA has removed the threshold of 50% in sustainable investments for the use of sustainability-related words in funds' names.
• ESMA considers it more appropriate that funds intending to use sustainability-related terms shall:
  • apply the 80% minimum proportion of investments used to meet the sustainability characteristics or objectives;
  • apply the Paris-aligned Benchmark (PAB) exclusions contained in Article 12(1)(a)-(g) of Commission Delegated Regulation (EU) 2020/1818; and
  • invest meaningfully in sustainable investments defined in Article 2(17) SFDR, reflecting the expectation investors may have based on the fund's name.

Adaption to transition

A new category for transition-related terms

• A new category of transition-related terms has been created for which, in addition to the 80% threshold, Climate Transition Benchmark (CTB) exclusions should be applied.
• This revision is intended to avoid penalising funds that incorporate those terms in their names and pursue strategies that support the transition towards a greener economy.

Separation of "E" from "S" and "G" terms

• ESMA acknowledges that funds with social or governance terms in their names could be too restricted in their investment universe by fossil fuel exclusions contained in PAB.
• Where terms are combined, ESMA considers that the future Guidelines would apply cumulatively.
• In order to ensure that transition strategies are not unduly impacted, ESMA specifies that where environmental terms are used in combination with "transition" terms in the name of a fund, the CTB exclusions should apply.
• However, this would not apply to "sustainable" terms, as "sustainable" terms would always give an impression of sustainability irrespective of any other terms used in the name.

Impact and transition terms: measurability

• Funds using "transition" or "impact"-related terms in their names should also ensure that investments under the minimum proportion of investments are made with the intention to generate positive, measurable social or environmental impact alongside a financial return or are on a clear and measurable path to social or environmental transition.

Next Steps

ESMA intends to adopt the future Guidelines following the outcome of the review of the AIFMD and UCITS Directive and the expected entry into force of the new mandates.

The application date of the new Guidelines will be three months after the date of their publication on ESMA's website in all EU official languages.

• Managers of new funds will be expected to comply with the Guidelines in respect of those funds from the application date.
• Managers of existing funds will be expected to comply with respect to those funds six months after the application date.