ESMA Guidelines on funds' names using ESG or sustainability-related terms – a brief overview and some key takeaways

As fund managers face investor demand for funds that incorporate environmental, social and governance (ESG) factors, the European Securities and Markets Authority (ESMA) has been increasingly concerned about the risks of so-called "greenwashing" in the form of misleading sustainability disclosures. 

To address this, ESMA published new guidelines with respect to the use of ESG or sustainability-related terms in funds' names (the Guidelines) on 21 August 2024. The purpose of the Guidelines is to specify the circumstances where fund names using ESG, or sustainability related terms, are unfair, unclear or misleading.  

The Guidelines will apply in the EU from 21 November 2024. It is expected that the Financial Supervisory Authority of Norway (Finanstilsynet) will apply the Guidelines in Norway from the same date. 

Both UCITS managers and managers of alternative investment funds (AIFs) (including EuVECAs, EuSEFs, ELTIFs and money market funds) are in-scope of the Guidelines.

The Guidelines are relevant to all fund documentation and marketing communications addressed to investors or potential investors for UCITS and AIFs. The Guidelines are formulated as "recommendations" but will most likely be adopted by the fund industry as strict requirements. 

The Guidelines differentiate between three categories of funds. 

Category 1: Funds using transition-, social- and governance related terms 

Funds using transition-, social and governance related terms should:

• Meet an 80 % threshold linked to the proportion of investments used to meet environmental or social characteristic or sustainable investment objectives in accordance with the binding elements of the investment strategy which are to be disclosed to investors pre-contractually under SFDR (cf. Annexes II and III of Commission Delegated Regulation (EU) 2022/1288); and
   
• Exclude investments in companies involved in activities related controversial weapons, the cultivation and production of tobacco and that benchmark administrator find in violation of the United Nations Global Compact principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises (companies referred to in Article 12(1)(a) to (c) of Commission Delegated Regulation (EU) 2020/1818).
   

Category 2: Funds using environmental- or impact-related terms

For these funds, the requirements are the same as category 1 above, however so that there is an additional requirement to exclude (a) companies that derive 1 % or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite; (b) companies that derive 10 % or more of their revenues from the exploration, extraction, distribution or refining of oil fuels; (c) companies that derive 50 % or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels; and (d) companies that derive 50 % or more of their revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh.

Category 3: Funds using sustainability- related terms 

Funds using sustainability-related terms should:

• Meet an 80% threshold linked to the proportion of investments used to meet environmental or social characteristic or sustainable investment objectives in accordance with the binding elements of the investment strategy, which are to be disclosed to investors pre-contractually under SFDR (cf. Annexes II and III of CDR (EU) 2022/1288); and 
   
• Commit to invest meaningfully in sustainable investments referred to in SFDR.
   

The Guidelines also set out certain recommendations for funds designating an index as a reference benchmark, and where a fund name combines terms from more than one category.

It should be noted that the Guidelines set out an explanation of key terms used in the Guidelines, such as what is comprised by transition-, environmental-, social-, governance, impact-, and sustainability-related terms.

Fund managers that are in the process of planning or establishing new funds will need to carefully assess potential fund names and investment strategies considering the Guidelines. This requires an understanding not only of the Guidelines but also of the other rules and regulations it refers to, such as SFDR and the EU Taxonomy.

Fund managers with funds that were in existence on 21 November 2024 (the date of application of the Guidelines) will have to apply the Guidelines in respect of those funds from 21 May 2025 (six months from the application date of the Guidelines). This may result in that certain fund managers will have to change the names of their existing fund products. 

You can read the Guidelines on ESMA's website.

If you have any questions relating to the Guidelines or if you need legal guidance related to funds, we are here to assist.