EU: ESMA postpones adoption of ESG and sustainability-related terms in fund names guidance until Q2 2024

On 14 December 2023, ESMA published a statement providing an update on the status of ESMA’s guidelines on ESG and sustainability-related terms in fund names ("Guidelines"), including details on the timing of their publication and details of where the proposals are headed. 

In summary, adoption of the Guidelines has been delayed to Q2 2024 to follow the finalisation and publication of the EU AIFMD II and revised UCITS rules. This is because of market/industry feedback that ESMA does not in fact have a mandate to publish these Guidelines under the current EU rules - however the upcoming AIFMD II / UCITS rule changes will give ESMA this mandate (and in fact that mandate will cover fund names more broadly and is not limited to the use of ESG terms in fund names).

Overall the feedback on the direction of the proposals is not very dissimilar to what ESMA had proposed initially - however they have notably dropped the 50% sustainable investment ("SI") requirement for funds using sustainable/sustainability (and similar variations in their names). However the guidance maintains that such funds must "invest meaningfully" in SIs “reflecting the expectations investors may have based on the fund's name”.

Delayed timings

ESMA has decided to postpone the adoption of the Guidelines to Q2 2024 to ensure that the outcome of the AIFMD and UCITS reviews may be fully considered. The Guidelines would apply three months after the date of their publication on the website in all EU official languages.  

• New funds launched after the guidelines - managers would have to comply with the Guidelines in respect of those funds from the date of application of the Guidelines (which as noted above, will be 3 months after their publication date). 
   
• Funds existing before the date of application of the Guidelines - managers would have to comply with the Guidelines in respect of those funds, within six months from the application date of the Guidelines.

Application to non-fund SFDR products

The guidelines don't apply to SFDR financial products that are not funds (and for the avoidance of doubt, do not apply to non-SFDR financial products such as bonds or shares). However, in practice EU national competent authorities may apply the same standards to other products using ESG terms in their name.

Application of the guidelines to different types of ESG terms in fund names

^{*Note: the PAB exclusions cover (a) to (g) below, meanwhile the CTB exclusions only cover (a) to (c) below:}

^{(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; and}

^{(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.}