EU: ESMA publishes final guidelines on the use of ESG-related terms in fund names

The European Securities and Markets Authority (ESMA) has substantially rewritten its fund naming rules since its November 2022 proposals. Fund managers will need to review their funds and reconsider the names and investment policies of funds that fall within the guidelines.

Why should I read this?

On 14 May, ESMA published its Final Report on the Guidelines on funds’ names using ESG or sustainability-related terms. Following extensive feedback, a revised version of the guidelines was announced by ESMA in a public statement “Update on the guidelines on funds’ names using ESG or sustainability-related terms” published on 14 December 2023. The final guidelines follow the approach taken in the public statement.

Mandate and scope

The mandate for ESMA to develop guidelines on unclear, unfair or misleading fund names comes from Directive (EU) 2024/927 amending the AIFMD and UCITS Directives, commonly referred to as “AIFMD II”.

The Guidelines apply to:

EU UCITS management companies
any EU UCITS which has not designated a UCITS management company
EU alternative investment fund managers
internally managed EU AIFs
managers of EuVECAs, EuSEFs, ELTIFs and MMFs
NCAs

It is not clear whether the Guidelines apply to non-EU managers marketing funds in the EU under national private placement regimes. Although such managers are required to comply with SFDR requirements, it is unclear how ESMA (through the NCAs) could enforce compliance. Further guidance may be provided directly by the NCAs of the individual Member States.

Aside from this uncertainty, the Guidelines do not apply to UK UCITS (or management companies) or UK AIFs (or AIFMs) as AIFMD II is not being onshored. Although the UK SDR regime addresses fund names, the rules differ and so this remains an area of divergence between the regimes.

The Guidelines do not address the issue of the naming of products that are closed to new investors and are no longer marketed.

The six categories

The Guidelines apply to six categories of ESG-related terms. The use of terms within those categories in fund names are subject to restrictions and exclusions.

SUSTAINABILITY-RELATED
Terms	Any terms derived from the base word “sustainable” eg “sustainably”, “sustainability”.
Requirements	Meets an 80% threshold linked to the proportion of investments used to meet the Fund’s E or S characteristics or sustainable investment objective in accordance with the binding elements of the investment strategy as disclosed in SFDR pre-contractual disclosures; and Commits to invest meaningfully (The term “meaningfully” is not defined by the Guidelines or SFDR.) in ‘sustainable investments’ as that term is understood under Article 2(17) of SFDR (Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector (“SFDR”).
Exclusions	Based on the criteria for the Paris aligned benchmark the following investments are excluded companies involved in any activities related to controversial weapons companies involved in cultivation and production of tobacco companies that benchmark administrators find in violation of the UN Global Compact principles or the OCED Guidelines for Multinational Enterprises companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution, or refining of hard coal and lignite companies that derive 50% or more of their revenues from the exploration, extraction, distribution or refining of oil fuels companies that derive 50% or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels companies that derive 50% or more of their revenues from electric generation with a GHG intensity of more than 100g CO2 e/kWh (the "PAB Exclusions")

ENVIRONMENTAL-RELATED
Terms	Any terms words the investor any impression of the promotion of environmental characteristics eg “green”, “environmental”, “climate” etc. These may also include “ESG” or “SRI”.
Requirements	Meets an 80% threshold linked to the proportion of investments used to meet E or S characteristics or sustainable investment objective in accordance with the binding elements of the investment strategy as disclosed in SFDR pre-contractual disclosures.
Exclusions	The PAB Exclusions, the same as for sustainability related terms.

IMPACT-RELATED
Terms	Any terms derived from the base word “impact” e.g. “impacting”, “impactful” etc.
Requirements	Meets an 80% threshold linked to the proportion of investments used to meet E or S characteristics or sustainable investment objective in accordance with the binding elements of the investment strategy as disclosed in SFDR pre-contractual disclosures; and Ensures that investments used to meet the threshold are on a clear and measurable path to social or environmental transition or are made with the objective to generate a positive and measurable social or environmental impact alongside financial return.
Exclusions	The PAB Exclusions, the same as for sustainability related terms.

TRANSITION-RELATED
Terms	Any terms derived from the base word “transition” eg transitioning, transitional etc., and terms derived from “improve”, “progress”, “evolution”, “transformation”, “net zero”, etc.
Requirements	Meets an 80% threshold linked to the proportion of investments used to meet E or S characteristics or sustainable investment objective in accordance with the binding elements of the investment strategy as disclosed in SFDR pre-contractual disclosures; and Ensures that investments used to meet the threshold are on a clear and measurable path to social or environmental transition or are made with the objective to generate a positive and measurable social or environmental impact alongside financial return.
Exclusions	Exclusionary criteria under the EU climate transition benchmark excluding investments in: companies involved in any activities related to controversial weapons companies involved in cultivation and production of tobacco companies that benchmark administrators find in violation of the UN Global Compact principles or the OCED Guidelines for Multinational Enterprises (the "CTB Exclusions).

SOCIAL-RELATED
Terms	Any terms words the investor any impression of the promotion of social characteristics eg “social”, “equality”.
Requirements	Meets the 80% threshold linked to the proportion of investments used to meet E or S characteristics or sustainable investment objective in accordance with the binding elements of the investment strategy as disclosed in SFDR pre-contractual disclosures; and Ensures that investments used to meet the threshold are on a clear and measurable path to social or environmental transition or are made with the objective to generate a positive and measurable social or environmental impact alongside financial return.
Exclusions	The CTB Exclusions.

GOVERNANCE-RELATED
Terms	Any words the investor any impression of a focus on governance “governance”, “controversies”, etc.
Requirements	Meets the 80% threshold linked to the proportion of investments used to meet E or S characteristics or sustainable investment objective in accordance with the binding elements of the investment strategy as disclosed in SFDR pre-contractual disclosures; and Ensures that investments used to meet the threshold are on a clear and measurable path to social or environmental transition or are made with the objective to generate a positive and measurable social or environmental impact alongside financial return.
Exclusions	The CTB Exclusions.

Entry into force

The Guidelines will apply three months after the publication on ESMA’s website in all EU official languages. New funds created after the date of the application of the Guidelines must apply them immediately. Funds established before the date of application of the Guidelines must comply within six months of them coming into force.

Next steps

Fund Managers should review their fund ranges to identify which funds use or intend to use terms covered by the Guidelines. Those funds should be further reviewed to see if they comply with the Guidelines.

For non-compliant funds, managers will either have to revise their investment policies and processes to meet the Guidelines or change the names of those funds to remove the restricted words. Such changes are likely to require investor engagement or consent and, in the case of regulated funds, approval of the supervisory authority as well as a prior redemption period.

Taking into account the relatively short period to comply with the Guidelines, action should be taken as soon as possible.

How Eversheds Sutherland can help

We have extensive experience and expertise in advising clients on ESG matters. Our team has been closely following the development of SFDR and all related frameworks such as the ESMA naming rules. Please speak to your usual Eversheds-Sutherland contact if you need help with the interpretation of the Guidelines and their impact on the products you manage. We can assist you with any changes that may need to be implemented for your funds to comply with the requirements introduced by the Guidelines.

Thank you to Marta Gajos for writing this article.

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