Final Report from ESMA with guidelines on funds’ names

The European Securities and Markets Authority (“ESMA”) has published a final report containing guidelines on funds’ names using ESG or sustainability-related terms (hereafter the “Final report”). The Final report follows on from previous statements and guidelines.

Due to a competitive market and an increasing demand from investors, many asset managers may use ESG terminology in fund names such as green or socially sustainable with the purpose to attract investors.

The guidelines on funds names (hereafter “the Guidelines”) are set out in Annex IV of the Final report and aim to ensure that investors are protected from misleading use of fund names leading to greenwashing. Further, they shall ensure that asset managers have understandable and measurable criteria for using ESG or sustainability-related terms in fund names.

The Guidelines:

The Guidelines can be accessed here and apply to the following parties: UCITS management companies (including UCITS which has not designated a UCITS management company), AIFMs including internally managed AIFs, EuVECA, EuSEF, ELTIF, MMFs mangers and competent authorities. In general, they shall do their best to comply with the guidelines, and the competent authorities shall incorporate the Guidelines into their supervisory frameworks.

The competent authorities to which the Guidelines apply shall notify ESMA whether they either a) comply, b) do not comply but intend to do so or c) do not comply with the Guidelines and have no intention to do so. The notification shall be given within two months from the date the Guidelines are published by ESMA. The financial market participants are not obligated to notify ESMA.

The following recommendations apply to funds using transition-, social- and governance-related terms:

• Funds shall meet an 80% threshold which is linked to the proportion of investments used to meet sustainable investment objectives or environmental or social characteristic in accordance with the binding elements of the investment strategy disclosed in the pre-contractual disclosures; and,
• Funds shall exclude investments in companies listed in Commission Delegated Regulation (EU) 2022/1818 of 17 July 2020 supplementing Regulation (EU) 2016/1011 as regards minimum standards of EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks (hereafter “CDR (EU) 2020/1818”) article 12(1)(a) to (c) (such as companies involved in any activities related to controversial weapons).

The following recommendations apply to funds using environmental- or impact-related terms:

• Funds shall meet an 80% threshold which is linked to the proportion of investments used to meet sustainable investment objectives or environmental or social characteristics in accordance with the binding elements of the investment strategy disclosed in the pre-contractual disclosures; and,
• Funds shall exclude investments in companies listed in CDR (EU) 2020/1818 article 12(1)(a) to (g) (also covering companies deriving a certain percentage of their revenues from for example mining, exploration and distribution of oil fuels).

The following recommendations apply to funds using sustainability-related terms:

• Funds shall meet an 80% threshold which is linked to the proportion of investments used to meet sustainable investment objectives or environmental or social characteristics in accordance with the binding elements of the investment strategy disclosed in the pre-contractual disclosures;
• Funds shall exclude investments in companies listed in CDR (EU) 2020/1818 article 12(1)(a) to (g); and,
• Funds shall commit to invest meaningfully in sustainable investments in accordance with SFDR article 2(17).

If a fund combines the use of transition-, social- and governance-related terms with environmental- or impact-related terms, the recommendations for both categories will apply.

The following recommendations apply to specific type of funds:

• With regards to funds designating an index as a reference benchmark, they shall only use terms referred to in the above three categories of recommendations in their names if the recommendations are actually fulfilled.
• With regards to funds using transition- or impact-related terms in their names, they shall make sure that the investments used to meet the threshold, which apply to either funds using environmental- or impact-related terms or funds using sustainability-related terms, aim towards environmental or social transition or are based on the objective to generate a measurable and positive social or environmental impact at the same time as a financial return.

All the above recommendations shall be considered by the competent authorities when supervising funds.

The full report contains, beside the specific guidelines, also information about the background for the guidelines, detailed overview of feedback and advice from relevant stakeholders and a cost-benefit analysis.

Next step: The Guidelines will be translated into all the official EU-languages and in continuation be published on ESMA’s webpage. Three months after the translated Guidelines have been published, they will apply. The national competent authorities, in Denmark the Danish Financial Authority, must notify ESMA whether they comply or intend to comply with the Guidelines within two months from the publication. For funds existing before the application date, there will be a transition period of six months.

Tags:  ESMASustainability