The name of a fund is usually the first fund attribute investors see, and while investors are expected to look beyond the name itself, the name can have a significant impact on their investment decisions. ESMA believes that to prevent misleading investors and prevent potential greenwashing risk, the use of ESG or sustainability-related terms in a fund name should be supported in a material way by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy.
Against this backdrop, ESMA has launched for consultation draft Guidelines on the use on funds’ names with ESG or sustainability-related terms. The consultation closes on 20 February 2023 with ESMA expecting the final Guidelines to be issued by Q2/Q3 2023.
What do the Guidelines propose?
ESMA is proposing to introduce quantitative thresholds for the minimum proportion of investments sufficient to support the ESG or sustainability-related terms in funds’ names. ESMA has already provided some principles-based guidance to national competent authorities in its supervisory briefing on sustainability risks and disclosures in the area of investment management in May 2022 (see our earlier blog post for more). ESMA states that the option of including quantitative thresholds has been inspired by developments in Germany, France, the U.S. and also the UK’s FCA proposals to introduce restrictions on how certain sustainability-related terms can be used in product names and marketing for products which do not qualify for the sustainable investment labels (see our earlier blog post for more).
The general principle is that fund names should not be misleading, and the disclosure of sustainability characteristics should be commensurate with the fund’s approach. However, in applying this ESMA have suggested some quite specific criteria:
- If a fund uses any “ESG” or “impact-related” words in its name, a minimum proportion of 80% of its investments should be used to meet the E/S characteristics or sustainable investment objective. Minimum safeguards including the exclusion criteria in Article 12 of Delegated Regulation (EU) 2020/1818 (i.e. the exclusion criteria that apply to Paris-aligned benchmarks like excluding controversial weapons, tobacco, UNGC/OECD violators and companies with certain exposures to fossil fuels) are “recommended”.
- If a fund uses the word “sustainable” or any other term derived from the word “sustainable” in its name, 50% within the 80% general threshold above should be a minimum proportion of sustainable investments.
- The term “impact” or “impact investing” should also only be used (in addition to the criteria above) where the fund’s investments “are made with the intention to generate positive, measurable social or environmental impact alongside a financial return”.
- For index tracking funds the same criteria apply.
The Annexes to the draft guidelines give some examples of applying these criteria in practice.
When would the Guidelines apply?
ESMA proposes that the draft Guidelines would become applicable from 3 months after the publication of their translation on ESMA’s website (so potentially Q3/Q4 2023). Furthermore, a transitional period of 6 months is suggested for those funds launched prior to the application date, in order to comply with the Guidelines.
ESMA press release published on 18 November 2022 is available here.