Regulatory focus on greenwashing: ESMA publishes final ESG guidance for fund names

Overview of the guidelines

The European Securities and Markets Authority (ESMA) recently published its final guidelines on fund names using ESG or sustainability-related terms. The new guidance sets out requirements for fund managers using these terms in fund names with the aim of reducing greenwashing risks and to enhance investor protection from exaggerated or misleading sustainability claims.

Scope

The guidelines apply to various fund managers, including AIFMs. It is not clear whether the guidelines apply to non-EU fund managers – we will need to see how individual countries in the EU implement the guidelines. 

Key recommendations of the guidelines 

All funds with ESG or sustainability-related terms in their name will need to ensure 80% of the fund’s investments meet the environmental or social characteristic or sustainable investment objectives promoted by the fund. In scope funds will also need to apply an exclusion criterion dependent on the ESG terms used.

Funds which use sustainability-related, environment or impact-related terms within its name will have to apply the Paris-aligned Benchmarks exclusion criteria and exclude investment in companies such as companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite.

Funds which use transition, social and governance related terms within its name will have to apply the Climate Transition Benchmark exclusion criteria and exclude investment in companies such as companies involved in any activities related to controversial weapons and companies involved in the cultivation and production of tobacco.

Additional recommendations to be considered

In addition to the minimum threshold and exclusion criteria additional provisions may also apply as follows:

• Funds with sustainability-related terms in their name including “sustainably” and other terms derived from sustainable must also invest meaningfully in SFDR-aligned sustainable investments. 
• Funds using transition-related terms include “transitioning” and any terms derived transition and any terms deriving from improve, progress, evolution, transformation, net-zero should ensure they on a clear and measurable path to social or environmental transition.
• Funds with impact-related terms such as “impactful” and any terms derived from the word impact in their names should ensure investments are made with the objective to generate a positive and measurable social or environmental impact alongside a financial return.
• Funds which combine ESG-related terms such as “sustainable” and “environmental” within its name should apply the guidelines cumulatively with the exception where transition-related terms are included. 

The requirements set out in the guidelines are on-going and should be considered by fund managers throughout the life of the fund.

Implementation of the guidelines 

The guidelines will come into force three months after publication in all EU official languages. Fund managers of funds which existed before the application date will have a transitional period of six months to comply and fund managers of funds created after the application date will have to comply immediately. 

Horizon scanning

Further developments from the European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) are anticipated with the ESAs each expected to publish the final greenwashing reports this month.  The European Commission will review the reports and consider the ESAs final recommendations, including on possible changes to the EU regulatory framework. 

The European Commission is also expected to decide on whether to include the proposed amendments from ESAs report published in December 2023 on amending the draft Regulatory Technical Standards to the Delegated Regulation supplementing the Sustainable Finance Disclosure Regulation (known as SFDR 1.5). ESMA previously published that the European Commission would decide whether to endorse the changes within three months although no decision has been made yet. 

Eloise Edwards-Hedges, paralegal, also contributed to this article.

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