EU: ESMA publishes its awaited Final Guidelines on funds’ names using ESG or sustainability-related terms

ESMA has now published its long-awaited Final Report setting out its Guidelines on funds’ names using ESG or sustainability-related terms. 

Key points to note:

Overall, the final guidelines broadly align with the position proposed in ESMA’s December 2023 status update, and in many ways is as we expected (see our earlier blog post here).  There are a few key points to note however:

• ESMA have, as expected notably dropped the 50% sustainable investment ("SI") requirement for funds using sustainable/sustainability (and similar variations) in their names. Whether NCAs nevertheless impose a majority / 50% “sustainable investments” (SI) expectation in practice remains to be seen, given that ESMA has specified that such funds must still commit to invest “meaningfully” in SIs. 
   
• ESMA have also proceeded with their initial proposals to apply the stricter PAB exclusions to all funds using environmental terms (excluding transition terms) in their name and the lighter CTB exclusions applying to all funds using transition, social or governance related terms in their name. Unhelpfully, ESMA have taken the view that terms like “ESG” and “SRI” should be seen as environmental terms as well and subject to the stricter PAB exclusions. 
   
• A specific category for transition-related terms has been introduced – as was announced in December 2023.  The intention here is to help catch a wide set of terms that give the impression of a positive evolution towards the ESG goals described in the objectives.  However, the guidance takes a very broad view on words that should be seen as transition-related terms, including words such as “progress” and “transformation” – which arguably would not ordinarily have ESG connotations or give an ESG impression. 
   
• Unhelpfully, ESMA have also stated that these guidelines should be complied with by funds that are closed for investment – even though the funds are no longer open for investment within Europe. Managers of closed funds will therefore need to do an impact analysis to see what is feasible (uplifting the portfolio or changing the fund name) – and if the investment phase of the fund has been largely completed, the only option may be to change the fund name.  
   
• The rules apply in the same way to active and passive funds.  

Next steps: Timing and Transitional Period

What comes next is for the Guidelines to be translated into all EU languages and subsequently published on ESMA’s website. They will start applying three months after that publication.

• New funds launched after the application date of the Guidelines - managers would have to comply with the Guidelines in respect of those funds immediately
   
• Funds existing before the date of application of the Guidelines – consistent with the position set out in the consultation paper, managers would have to comply with the Guidelines in respect of such funds, within six months from the application date of the Guidelines (9 months from publication of translations).

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.}