In brief
On 14 May 2024, the European Securities and Markets Authority (ESMA) published the guidelines on fund names using environmental, social and governance (ESG) or sustainability-related terms.
The main purpose of these guidelines is to enhance investor protection with regard to funds named in ways suggesting an investment focus in companies that meet certain sustainability standards.
Indeed, the sustainability-related name of a fund may hold an attractive impact on investors and their investment decisions. Yet, when the sustainability-evoking name is not reflective of the actual engagement of the fund, this could, in turn, lead to greenwashing practices.
Against this backdrop and after the public consultation launched on 18 November 2022, ESMA clarifies what investors may expect in terms of policies, practices and characteristics of funds consistent with sustainability standards, as also the circumstances where a fund name with ESG or sustainability-related terms is indicative of unfair, unclear or misleading practices.
As the guidelines apply immediately for new funds to be created and six months following the publication of the guidelines of existing funds, fund managers may have to reconsider the name used for their funds comprising an ESG or sustainability related name.
For further information and to discuss what this development might mean for you, please get in touch with your usual Baker McKenzie contact.
Key takeaways
These guidelines apply to:
- UCITS management companies, including any UCITS which has not designated a UCITS management company
- Alternative Investment Fund Managers, including internally managed AIFs, EuVECA, EuSEF and ELTIF
- MMFs managers as well as competent authorities
They apply to any of the abovementioned funds that have the following terms in their names:
- Transition-related terms (such as "transitioning," "transitional," and those terms deriving from "improve," "progress," "evolution," "transformation," "net-zero," etc.)
- Environmental-related terms (such as "green," "environmental" and "climate"; may also include "ESG" and "SRI" abbreviations)
- Social-related terms (such as "social" and "equality")
- Governance-related terms (such as "governance" and "controversies")
- Impact-related terms (such as "impacting" and "impactful")
- Sustainability-related terms (such as "sustainable" and "sustainably")
For each of these terms, certain thresholds have to be met by the fund's investment strategy. For instance:
- Funds employing a name with sustainability-related terms should apply a 80% threshold rule with regard to the investments used to meet environmental or social characteristic or sustainable investment objectives, and exclude investments in companies listed under Article 12(1)(a) to (g) of Commission Delegated Regulation (EU) 2020/18181. Lastly, according to the amended guidelines, the fund should commit to invest meaningfully in sustainable investments as defined under SFDR.
- A fund employing a name with transition-, social-, or governance-related terms should apply a 80% threshold rule with regard to the investments used to meet environmental or social characteristic or sustainable investment objectives, and exclude investments in companies as per Article 12(1)(a) to (c) of Commission Delegated Regulation (EU) 2020/1818.
- A fund employing a name with environmental- or impact-related terms should apply a 80% threshold rule with regard to the proportion of investments used to meet environmental or social characteristic or sustainable investment objectives, and exclude investments in companies referred as per Article 12(1)(a) to (g) of Commission Delegated Regulation (EU) 2020/1818.
These guidelines are applicable three months after their publication into all EU languages.
The guidelines apply immediately for funds to be newly created. For existing funds, the transitional period for will be six months after the above mentioned publication.
1 Article 12 (1) reads as follow: "Administrators of EU Paris-aligned Benchmarks shall exclude all of the following companies from those benchmarks:
(a) companies involved in any activities related to controversial weapons;
(b) companies involved in the cultivation and production of tobacco;
(c) companies that benchmark administrators find in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises;
(d) companies that derive 1 % or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite;
(e) companies that derive 10 % or more of their revenues from the exploration, extraction, distribution or refining of oil fuels;
(f) companies that derive 50 % or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels;
(g) companies that derive 50 % or more of their revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh.
For the purposes of point (a), controversial weapons shall mean controversial weapons as referred to in international treaties and conventions, United Nations principles and, where applicable, national legislation.
