Following an 18 month wait since the publication of the European Securities and Markets Authority's ("ESMA") consultation on funds' names using ESG or sustainability-related terms, we now have ESMA's final report containing the applicable guidelines ("Guidelines"). This has brought some clarity in terms of application dates and the general criteria to be applied, although there are a number of areas where further guidance or clarification at the EU or domestic level would assist in mitigating the implementation challenges.
The Guidelines do not provide an exhaustive list of terms that will bring a fund within scope. The conditions applied where certain terms are used in funds' names are set out in the table below.
| Terms Used | Conditions Applicable |
|---|---|
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Social-related |
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Transition-related Any terms derived from the base words “transition”, “improve”, “progress”, “evolution”, “transformation”, “net-zero. Examples: “transitioning”, “transitional” “improving”, “progress/ ion”. |
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Environmental-related Examples: “green”, “environmental”, “climate”, “ESG”, “SRI”. |
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Impact-related Examples: “impacting”, “impactful”. |
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Sustainability-related Any terms only derived from the base word “sustainable”. Examples: “sustainably”, “sustainability”. |
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The Guidelines provide that, where terms are combined, the
provisions should apply cumulatively. In order to ensure that
transition strategies are not unduly impacted, ESMA has specified
that, where environmental terms are used in combination with
transition terms in the name of a fund, the CTB exclusions should
apply. This would, however, not apply for
"sustainable" terms, as "sustainable" terms
should always give an impression of sustainability irrespective of
any other terms used in the name.
Fund managers must now assess the impact of the Guidelines on their existing fund ranges. Where an existing portfolio using ESG or sustainability-related terms does not comply with the Guidelines, managers must consider whether to:
- change the name of the relevant fund; or
- change the investment policy / strategy to comply with the Guidelines.
In the version of the Guidelines consulted upon in November 2022, it had been proposed to require that a fund using the term "sustainable" or sustainability-related terms in its name would be required to meet a 50% threshold of sustainable investments. This threshold has been replaced in the final Guidelines with the requirement to "invest meaningfully in sustainable investments", without further guidance as to what is meant by "invest meaningfully". This formulation could give rise to different interpretations by national competent authorities, which would undermine supervisory convergence and cross-border distribution.
Next Steps
The Guidelines are being translated into the official languages of the EU and the translations will be published on ESMA's website once complete. The Guidelines will apply three months after the date of that publication. Funds existing before the application date will be subject to a six month transitional period.
An important point to note in relation to timing is that it is expected that the European Commission will adopt changes to the SFDR Level 2 regulatory technical standards before the end of 2024 and that fund managers will have at least one year to comply with the revised Level 2 measures. A misalignment between the timing of the application of the Guidelines and the Level 2 measures would require managers to revise their precontractual disclosures by two separate deadlines within a very short timeframe. This may lead to confusion for end investors and to increased costs.
Industry is currently engaging with the Central Bank of Ireland in relation to industry's implementation concerns and has requested that a fast-track process be put in place to process any changes to fund names or fund documentation necessitated by the application of the Guidelines, as has been put in place on previous occasions where the SFDR required updates to fund disclosures.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.