ESMA sets Guidelines for ESG and Sustainability-Related Fund Names

ESMA published the translations of its Guidelines in all official European Union languages in August, with the Guidelines coming into effect on November 21, 2024. Existing funds will thereafter have 6 months to come into compliance (i.e. deadline is expected to be May 21, 2025).

Essentially, the Guidelines stipulate that use of ESG or sustainability-related terms in a fund name will trigger mandatory quantitative investment requirements and exclusions to the fund. If a fund or manager is unwilling or unable to comply with these restrictions, then it will be necessary to change the name of the fund or to cease using the relevant ESG term that has triggered these requirements.

The Guidelines set out several categories of terms which are considered ESG or sustainability-related terms, and as a result are subject to the following obligations:

1. Funds using transition, social and governance terms should apply an 80% threshold to the proportion of investments used to meet the environmental or social characteristics or sustainable investment objectives and apply the climate transition benchmark (CTB) exclusions.
2. Funds using environmental or impact-related terms should apply an 80% threshold to the proportion of investments used to meet the environmental or social characteristics or sustainable investment objectives and apply the Paris-aligned benchmark (PAB) exclusions.
3. Funds using sustainability-related terms should apply an 80% threshold to the proportion of investments used to meet the environmental or social characteristics or sustainable investment objectives, apply the PAB exclusions, and invest meaningfully in sustainable investments as defined in Article 2(17) SFDR.

The Guidelines also provide:

• where a fund name combines terms from 1 and 2 above, the provisions apply cumulatively, except for those terms combined with any transition-related terms, where the CTB exclusions will apply
• funds whose name includes any of the above terms that designate an index as a reference benchmark, must fulfil the guidelines’ expectations
• funds using “transition” or “impact” related terms should also ensure that the investments used to meet the 80% threshold are on a clear and measurable path to social or environmental transition or are made with the objective to generate a positive and measurable social or environmental impact alongside a financial return.

Options for non-compliant funds:

1. re-name the fund or,
2. change investment portfolio to comply with new rules.

Waystone Compliance Solutions provides services to investment managers to ensure they can meet all of their ESG investing challenges. If you would like to find out more about our ESG solutions, please reach out to your usual Waystone representative, or contact us below.

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