On 14 December, the European Securities and Markets Authority (ESMA) issued a Public Statement updating its proposals for guidelines on funds' names using ESG or sustainability-related terms, following its consultation on the same guidelines (ESMA34-472-373, the Guidelines) that ran from November 2022 to February 2023.
Key Changes to the Guidelines Since the Consultation
Thresholds for Sustainable Investments
ESMA has decided against applying the threshold of 50% in sustainable investments for the use of sustainability-related words in funds' names and instead proposes that such terms be used only where funds (a) use at least 80% of investments to attain environmental or social characteristics or objectives; (b) apply the Paris-Aligned Benchmark (PAB) exclusions (such exclusions being, e.g., certain activities related to tobacco and certain controversial weapons and fossil fuels); and (c) invest meaningfully in "sustainable investments" (as defined in Article 17 (2) of the SFDR).
Transition-Related Terms
ESMA proposes that funds that use "transition"-related terms should, in addition to the 80% threshold, apply Climate Transition Benchmark exclusions (as set out in Articles 12(1)(a)-(c), and 12(2) of Regulation (EU) 2020/1818).
Separation of "Environmental" From "Social" and "Governance" Terms
Funds with social or governance terms, and no environmental terms, in their names need not apply PAB exclusions as their investment universe may otherwise be unduly restricted by the fossil fuel exclusions.
Measurability of Impact and Transition Terms
Funds using "transition" or "impact"-related terms in their names should also ensure that a proportion of investments generate positive, measurable social or environmental impact or are on a clear and measurable path to transition.
Next Steps
It is expected the Guidelines will be published in 2024 (following the ongoing AIFMD and UCITS review) and, while compliance will be immediately expected for new funds, existing funds will have a 6 month implementation period.
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