ESG: ESMA consults on guidelines for ESG-related funds’ names

On 18 November 2022, the European Securities and Markets Authority (ESMA) published a consultation paper (CP) on guidelines for naming funds’ using ESG or sustainability-related terms.

The CP is the latest in a series of anti-greenwashing initiatives undertaken by ESMA and aims to develop a set of Guidelines on funds’ names with ESG or sustainability-related terms. The Guidelines seek to ensure funds’ names accurately reflect the investment objectives, policy and strategy of the fund as described in its documentation. They will apply to UCITS management companies, alternative investment fund managers (AIFMs), EuVECAs, EuSEFs and ELTIF managers as well as competent authorities.

The proposed Guidelines will complement the principle-based guidance for funds’ names with ESG and sustainability-related terms provided by ESMA’s May 2022 supervisory briefing on sustainability risks and disclosures in the area of investment management.

What do the Guidelines include?

Generally, the CP proposes requirements that funds’ names in fund documents or marketing communications not to be misleading and only use ESG and sustainability-related terminology when supported in a material way by evidence of sustainability characteristics or objectives.

The CP seeks to tackle greenwashing risks in funds, by providing indicating quantitative thresholds for the use of ESG and sustainability related terminology in funds’ names so that marketing communications are clear, fair and not misleading.

• If a fund has the word "sustainable" or any other term derived from it in its name, it should allocate within the 80% of "ESG" investments at least 50% of minimum proportion of sustainable investments as defined under the Sustainable Finance Disclosures Regulation (SFDR).
• If a fund has any ESG-related words in its name, a minimum proportion of at least 80% of its investments should be used to meet the environmental or social characteristics or sustainable investment objectives in accordance with the binding elements of the investment strategy, as disclosed under the SFDR Delegated Regulation.

Next steps

The consultation requests that responses to the questions laid out in Annex II:

1. respond to the questions stated;
2. indicate the specific question to which the comment relates;
3. contain a clear rationale; and
4. describe any alternatives ESMA should consider.

All responses should be submitted by 20 February 2023 and ESMA expects to issue the final Guidelines by Q2/Q3 2023.

The Guidelines will apply three months following the date of their publication on ESMA's website, although a transitional period of six months will apply for those funds already existing before that date.