The European Securities and Markets Authority (ESMA) has published its much anticipated Final Report: Guidelines on funds' names using ESG or sustainability-related terms (Guidelines).
This follows a consultation on the subject between November 2022 and February 2023 and an update provided by ESMA last December.
Acknowledging the significant impact of fund names on investor decision-making, ESMA has determined that a fund with ESG- or sustainability-related terms in its name must apply at least 80% of its investments to meet environmental or social characteristics or sustainable investment objectives.
The Guidelines also apply exclusion criteria for certain terms in fund names:
- "Environmental", "impact" and "sustainability"- related terms will require compliance with the exclusions applicable to Paris-aligned Benchmarks; and
- "Transition, "social" and "governance"- related terms will necessitate compliance with the exclusions applicable to Climate Transition Benchmarks.
Use of "sustainability"-related terms in fund names will require a commitment to "invest meaningfully" in sustainable investments. Similar use of "transition" or "impact" – related terms will require that the relevant fund's investments used to meet the 80% threshold are on a clear and measurable path to transition or are made with the objective to generate a positive, measurable impact alongside a financial return.
The Guidelines will apply to all EU UCITS and EU AIFs, and it currently seems likely that they will also apply to non-EU funds marketed into the EU (this is a point on which we will be watching developments closely).
The Guidelines are expected to come into force in Q3 or Q4 2024, subject to completion of administrative formalities including a decision by national competent authorities on whether to apply them locally (which is generally expected). Existing funds will have an additional 3-month transition period before compliance becomes mandatory.
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