Loyens & Loeff New York regularly posts ‘Snippets' on a range of EU tax and legal topics. This Snippet describes the guidelines that have been published on the use of certain terms in the name of investment funds marketed in the EU.
During May 2024, the ESMA (the EU's financial markets regulating and supervising authority) published its final report with guidelines on the use of ESG or sustainability-related terms in fund names (the Guidelines). The Guidelines are part of the ESMA's broader attempt to tackle “greenwashing” in the EU.
Greenwashing means presenting a financial product that is “grey” or “not green enough” as a green product. Greenwashing through fund names may be tempting as there has been an increasing demand for green products by EU investors. The US equivalent of ESMA's effort is the SEC's Amendment to Fund Names Rules.
The Guidelines apply to EU authorized alternative investment fund managers. Although not totally clear, we expect that US fund managers may also have to demonstrate compliance with the Guidelines when filing for marketing in a specific EU state.
The Guidelines require a fund that has any “Transition”, “Environmental”, “Social”, “Governance”, “Impact” or “Sustainability” related term in its name, to secure that: (i) at least 80% of its investments are used to meet the objective as suggested by the fund's name, and (ii) certain type of investments are excluded. Additional conditions may apply depending on the term(s) used in the fund's name.
The Guidelines are technically not binding on national regulators but they are subject to a “comply or explain principle”. There should be little doubt that EU national regulators will opt for compliance and will integrate the Guidelines in their supervisory practices.
The Guidelines will be effective 3 months after their official publication (which requires translation in all official EU languages). Non-compliant situations that exist when the Guidelines become effective must become compliant within 6 months. If a fund's name needs to be changed to ensure compliance with the Guidelines and if the fund is organized in the form of a limited partnership (as is typically the case in Luxembourg fund structures), name change is typically a decision that can be taken by the fund's general partner.
The Guidelines demonstrate that fund managers should practice what they preach when marketing their ESG or sustainability-related fund products in the EU.
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