ESMA’s guidelines on funds’ names will apply from November 21, 2024

The European Securities and Markets Authority (ESMA) has published the translations in all official EU languages of its guidelines on funds’ names using ESG or sustainability-related terms.

The objective of the guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names.

Timeline

The guidelines will apply from November 21, 2024.

The transitional period for funds existing before the application date will be six months after that date, ie May 21, 2025. Any new funds created on or after the application date should apply these guidelines immediately.

Graphic: Martina Lindberg

Reporting requirements

The reporting requirements are:

From October 21, 2024, Member State competent authorities must notify ESMA whether they (i) comply, (ii) do not comply, but intend to comply, or (iii) do not comply and do not intend to comply with the guidelines.
In case of non-compliance, Member State competent authorities must also notify ESMA from October 21, 2024 of their reasons for not complying with the guidelines. 13.
A template for notifications is available on ESMA’s website. Once the template has been filled in, it shall be transmitted to ESMA.
Financial market participants are not required to report whether they comply with these guidelines.

Recommendations to fund managers on the use of terms in funds’ names

The guidelines aim to set common standards for fund managers when promoting UCITS and AIFs using transition-, impact-, ESG- or sustainability-related term in their name.

The ESMA recommendations are:

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 in Annexes II and III of CDR (EU) 2022/1288; and
- exclude investments in companies referred to in Article 12(1)(a) to (c) of CDR (EU) 2020/1818.
Funds using environmental or impact-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 in Annexes II and III of CDR (EU) 2022/1288; and
- exclude investments in companies referred to in Article 12(1)(a) to (g) of CDR (EU) 2020/1818.
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 in Annexes II and III of CDR (EU) 2022/1288;
- exclude investments in companies referred to in Article 12(1)(a) to (g) of CDR (EU) 2020/1818; and
- commit to invest meaningfully in sustainable investments referred to in Article 2(17) of the SFDR.
Where a fund name combines terms from more than one of fund types listed above, the provisions of those paragraphs should apply cumulatively, except for those terms combined with any transition-related terms.

Fund managers are expected to make “every effort” to comply with ESMA’s thresholds and requirements to prevent greenwashing and ensure that investors have a clear understanding of the sustainability characteristics of the funds they invest in.