EU ESMA requested responses on draft guidelines on use in funds’ names of ESG or sustainability-related terms, noting that fund names are a powerful marketing tool.
Usage of ESG Terms
Fund names to be supported in material way, meaning evidence of sustainability needs to be reflected fairly and consistently in the fund’s investment objectives and policy.
In particular, feedback requested on introduction of quantitative thresholds for the minimum proportion of investments sufficient to support ESG terms in funds’ names.
Consultation is consistent with EU ESMA's priority to promote transparency and tackle risk of greenwashing as identified in its Strategy and Sustainable Finance Roadmap.
Objective of consultation is to ensure investors protected against unsubstantiated or exaggerated sustainability claims while providing both NCAs and asset managers with clear and measurable criteria to assess names of funds including ESG related terms.
Consultation Elements
Main elements include quantitative threshold (80%) for use of ESG related words.
Also, additional threshold (50%) for the use of a sustainability-related term only, as part of the 80% threshold; minimum safeguards to investments for funds using terms.
Additional considerations to apply for specific types of funds (index, impact funds).
Effectiveness
Draft guidelines proposed to become applicable from 3 months after publication.
A six-month transitional period suggested for funds launched prior to application date.
Consultation to close on Feb. 20, 2023 with a view to finalizing guidance afterwards.
Postponed guideline adoption so AIFMD, UCITS review outcomes may be considered.
In particular, the text of the provisional agreement resulting from the interinstitutional negotiations contains two new mandates for ESMA to develop guidelines specifying the circumstances where the name of an AIF or UCITS is unclear, unfair or misleading.
Statement highlights the key content of guidance it intends to provide in Guidelines.
ESMA confirmed it no longer considers it appropriate to introduce a threshold of 50% in sustainable investments for the use of sustainability-related words in funds’ names.
Fossil fuel exclusions in Paris-aligned Benchmark (PAB) could unnecessarily penalize some using terms in name that are not environmental or focus on transition strategies, and so several amendments to text proposed in consultation paper should be made.
Proposed changes including a new category for transition-related terms introducing a new category for which in addition to an 80% threshold, Climate Transition Benchmark (CTB) exclusions should be applied, as well as the separation of E from S and G terms.
For Sustainable labels, application of PAB exclusions and investment consistent with article 2(17) of SFDR apply, with changes to impact and transition terms measurability.
Guidance will apply 3 months after its publication of the guidance in all EU languages.
New funds will have to directly apply the guidelines, and all existing funds will have approximately 6 months from application to align with these new guidelines.
In Apr. 2024, SIFMA issued comments regarding its serious concerns, see #208312.
May 14, 2024 Final Report and Guidelines
On May 14, 2024, EU ESMA issued final report containing Guidelines on funds' names using ESG or sustainability-related items, a summary of responses to consultation.
And an explanation of the approach taken by ESMA to address the comments received.
ESMA adjusted the guidelines in several areas and sets out final guidelines in report.
Decided to drop the additional threshold of at least 50% of minimum proportion of sustainable investment for use of word sustainable or similar term in name of fund.
On minimum safeguard for investment funds with ESG- or sustainability-related term in their name, ESMA has changed its approach by separating the terms referring to transition, proposed adjustments to ensure exclusions only applied to relevant funds.
Proposed creation of an additional category for funds using transition or related words in their name, will have to apply both 80% threshold and the CTB exclusions.
Guidelines will be translated into official EU languages, published on the ESMA website, competent authorities will then have 2 months to notify if they comply or intend to.
And the Guidelines will start applying 3 months after that publication, transitional period for funds existing before the application date will be 6 months after that date.
Any new funds created after application date should apply Guidelines immediately.
On Aug. 21, 2024, EU ESMA published the translations in all the official EU languages of its Guidelines on funds' names using ESG or sustainability-related terms.
The guidelines will start applying three months after this publication, on Nov. 21, 2024.
Within 2 months of this publication, i.e. Oct. 21, 2024, national competent authorities must notify ESMA whether they comply, intend to comply, or do not intend to comply.
The transitional period for funds existing before the application date will be 6 months after that date i.e. May 21, 2025, ESMA provides an infographic of the timeline.
New funds created on or after application date should apply guidelines immediately.
Regulators
EU ESMA
Entity Types
HF; IA; Inv Co
Reference
Trsl ESMA34-1592494965-657, PR, 8/21/2024; RP ESMA34-472-440, PR, 5/14/2024; PS ESMA34-1592494965-554, PR 12/14/2023; PR, ESMA34-472-379, ESMA34-472-373, 11/18/2022; 2021/0376 (COD), COM/2021/721 final; AIFMD Dir 2011/61; UCITS Dir 2009/65; ESG
Functions
Compliance; C-Suite; Environment; Product Design; Social
