Earlier today, the European Securities and Markets Authority ("ESMA") published its Final Report which contains final Guidelines on funds' names using ESG or sustainability-related terms (the "Guidelines").
Background
Today's publication follows ESMA's November 2022 consultation on the Guidelines, which closed in February 2023. Finalised Guidelines were expected before the end of 2023. In December 2023, ESMA provided an update on the delay. Following the launch of the work on the Guidelines, the AIFMD and UCITS Directive reviews had progressed at EU level. ESMA decided to postpone the adoption of the Guidelines to ensure that the outcome of those reviews in relation to funds' names could be fully considered and reflected, where appropriate, in the Guidelines.
The initiative followed a supervisory briefing on sustainability risks and disclosures in the area of investment management published in May 2022 which contained, among other things, some principles-based guidance for funds' names with ESG and sustainability-related terms.
In light of the feedback received during the November 2022 consultation (which is summarised in the Final Report), ESMA adjusted the Guidelines and has now published its Final Report containing updated Guidelines which are intended to address any greenwashing risk stemming from ESG- or sustainability-related terms used in investment fund names.
The Guidelines aim at setting common standards for fund managers when promoting UCITS and AIFs using a transition-, impact-, ESG- or sustainability-related term in their name, including European Long Term Investment Funds ("ELTIFs") and Money Market Funds ("MMFs").
ESMA states that the name of a fund is an important marketing tool for the fund. A fund's name is often the first piece of fund information investors see and, while investors should look closely at a fund's underlying disclosures, ESMA's view is that a fund's name can have a significant impact on an investor's investment decision.
The Guidelines are intended to provide asset managers with "clear and measurable criteria" to assess their ability to use certain terms in fund names and to ensure that investors are protected against exaggerated sustainability claims.
Recommendations
- Funds using transition-, social- and
governance-related terms should:
- meet a minimum threshold of 80% of investments used to meet environmental or social characteristics, or sustainable investment objectives in accordance with the binding elements of the investment strategy; and
- apply exclusion criteria according to the rules applicable to Climate Transition Benchmarks ("CTB").
- Funds using environmental- or
impact-related terms should:
- meet a minimum threshold of 80% of investments used to meet environmental or social characteristics, or sustainable investment objectives in accordance with the binding elements of the investment strategy; and
- apply exclusion criteria according to the rules applicable to Paris-aligned Benchmarks ("PAB").
- Funds using sustainability-related terms
should:
- meet a minimum threshold of 80% of investments used to meet environmental or social characteristics, or sustainable investment objectives in accordance with the binding elements of the investment strategy;
- apply exclusion criteria according to the rules applicable to PAB; and
- commit to invest meaningfully in sustainable investments referred to in the Sustainable Finance Disclosures Regulation.
Firms must make "every effort" to comply with the Guidelines. In addition, competent authorities are expected to ensure, through their supervision, that firms comply with the Guidelines.
Next Steps
The Guidelines will apply from three months after the Guidelines are translated into the official EU languages and published on ESMA's website (the "Application Date"), which is awaited. Managers of any new funds created after the Application Date, should apply the Guidelines immediately in respect of those funds. Notably, managers of funds existing before the Application Date should apply the Guidelines in respect of those funds from six months after the Application Date.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.