ESMA proposes changes and updates timeline for its Guidelines on funds’ names

ESMA has provided an update on its guidelines regarding the use of ESG and sustainability-related terms in fund names (eventid=18186). Initially, the guidelines were expected to be published in Q2 2024; however, ESMA has decided to postpone their adoption to account for the outcome of the AIFMD and UCITS Directive reviews. The revised legal texts include two new mandates for ESMA to establish guidelines specifying the conditions under which the name of an AIF or UCITS may be unclear, unfair, or misleading.
The guidelines propose that sustainability-related terms in fund names should be substantiated by evidence of sustainability characteristics or objectives, aligned with the fund’s investment objectives and policy. The guidelines initially suggested a 50% threshold for sustainable investments, but ESMA no longer considers this appropriate. Instead, the guidelines recommend that sustainability-related terms in fund names should meet the following criteria:
1. The fund should apply a minimum proportion of 80% investments to meet the sustainability characteristics or objectives.
2. The fund should apply the PAB exclusions.
3. The fund should meaningfully invest in sustainable investments as defined in Article 2(17) SFDR.
ESMA acknowledges that the fossil fuel exclusions in PAB may unnecessarily penalize some funds using terms related to transition strategies. To address this issue, the guidelines propose a new category for transition-related terms, requiring the application of CTB exclusions. This change aims to avoid penalizing funds with transition-related terms in their names that pursue strategies aligned with a greener economy.
Furthermore, the guidelines distinguish between environmental, social, and governance terms. Funds using social or governance terms in their names promoting social characteristics or objectives (or focusing on governance) may be overly restricted by fossil fuel exclusions. The guidelines propose that where terms are combined, they would apply cumulatively. To ensure that transition strategies are not unduly affected, ESMA intends to specify that where environmental terms are used in combination with “transition“ terms in the name of a fund, the CTB exclusions should apply.
Lastly, funds using “transition“ or „impact“-related terms in their names should 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.