ESMA Guidelines for fund names to harmonize ESG and sustainability terms

Following the public statement of 14 December 2023, the European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, yesterday published the final report containing Guidelines on funds’ names using ESG or sustainability-related terms.

The objective of the Guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names.

The Guidelines establish that to be able to use these terms, a minimum threshold of 80% of investments should be used to meet environmental, social characteristics or sustainable investment objectives. The Guidelines also apply exclusion criteria for different terms used in fund names:

“Environmental”, “Impact” and “sustainability”-related terms: exclusions according to the rules applicable to Paris-aligned Benchmarks (PAB); and“Transition, “Social” and “Governance”-related terms: exclusions according to the rules applicable to Climate Transition Benchmarks (CTB).In cases of a combination of terms, use of transition, sustainability- and impact-related terms, and for funds designating an index as a reference benchmark, further criteria are specified in the Guidelines.

The Final Report containing the guidelines also provides a summary of the responses ESMA received to its consultation paper and an explanation of the approach taken to address the comments received.

The Guidelines will be translated into all EU languages and will subsequently be published on ESMA’s website. They will start applying three months after that publication.

Within two months of the date of publication of the Guidelines on ESMA’s website in all EU official languages, competent authorities to which these guidelines apply must notify ESMA whether they (i) comply, (ii) do not comply, but intend to comply, or (iii) do not comply and do not intend to comply with the guidelines.

The transitional period for funds existing before the application date will be six months after that date. Any new funds created after the application date should apply these Guidelines immediately in respect of those funds.

Photo credit: © Markus Spiske