ESG and EU Fund Names: ESMA’s Final Guidelines

On 14 May 2024, the European Securities and Markets Authority (ESMA) published its final guidelines ESMA34-472-440 Final Report on the Guidelines on funds names (europa.eu) on the use of ESG- or sustainability-related terms in funds’ names (Guidelines). ESMA issued the Guidelines under new mandates stemming from the revisions to the Alternative Investment Fund Managers Directive (AIFMD), which came into force on 15 April 2024 and on which we commented in our recent alert End of the Beginning: AIFMD II’s Final Text.

The Guidelines broadly align with ESMA’s December 2023 update, noted in our previous alert. ESMA has, however, abandoned the 50% minimum ‘sustainable investment’ threshold, which it had originally proposed in its November 2022 consultation. Instead, a minimum of 80% of investments will be required to meet the environmental or social characteristics or the sustainable investment objectives for terms covered by the Guidelines that are used in fund names. Also of note is the Guidelines’ recognition of and rules for transition-related terms.

Timing

The Guidelines will come into force three months after they are published (following translation). Managers of existing funds will have a six-month period in which to comply (i.e., nine months from publication), whilst the Guidelines will apply to new funds immediately following publication.

Application to Non-EU Managers?

The Guidelines apply to provisions of the AIFMD, Recast UCITS Directive 2009, and EU Cross-Border Distribution Regulation 2019, which are only binding for managers established in the EU.

It is unclear whether individual EU member states will require non-EU managers to comply with the contents of the Guidelines through individual member state measures, especially where a non-EU manager has to apply for the approval of a private placement memorandum or other marketing materials with a member state national competent authority (NCA).

Fair, Clear, and Not Misleading: The Guidelines’ Focus

ESMA states: ‘A fund’s name is often the first piece of fund information investors see and, while investors should go beyond the name itself and look closely at a fund’s underlying disclosures, a fund’s name can have a significant impact on their investment decisions.’ The Guidelines are intended to tackle greenwashing risk in funds by using quantitative thresholds for the use of ESG and sustainability-related terminology in fund names. This is to ensure, in turn, that marketing communications are fair, clear, and not misleading and that fund managers are acting honestly and fairly. As well as having an impact on interoperability (discussed below), the Guidelines will be relevant to the following, covered in our recent Horizon Scan:

• AIFMD2 (from which the Guidelines flow), having been made under an AIFMD2 (and UCITS Directive) mandate
• The European Commission consultation on revisions to the Sustainable Finance Disclosure Regulations 2019 (SFDR), addressing marketing communications, product names, and whether or not the SFDR should include additional rules on labelling and marketing communications

The Guidelines — An Overview and Practical Points

The table below outlines the key obligations relating to the ESG- or sustainability-related terms AIFMs use in funds’ names, along with our comments on each.

Comparing the Guidelines with Other Regimes

The policy underpinning the Guidelines reflects current developments in countries such as the UK and the US and the rules governing fund names noted in our recent alert. We have set out in the table below some of the key points to compare and contrast the EU, UK and US fund names rules.

Regulatory supervisory expectations

The Guidelines require NCAs to notify ESMA within two months of publication of the Guidelines to confirm whether or not they have incorporated the Guidelines in their national frameworks.

NCAs are expected to treat temporary deviation from the thresholds and exclusions as passive breaches by an AIFM — unless the AIFM has acted deliberately, which the AIFM must correct. ESMA encourages the NCAs to proactively investigate in certain circumstances (e.g., discrepancies in the level of the quantitative threshold that are not passive breaches), by scrutiny of the AIFM’s periodic SFDR reporting.

To discuss the content of this alert, please contact the authors or your usual Goodwin contact.

¹The PAB exclusions prohibit investments in companies: (a) involved in any activities related to controversial weapons (as referred to in international treaties and conventions, UN principles and where applicable, national legislation); (b) involved in the cultivation and production of tobacco; (c) that benchmark administrations find in violation of the United Nations Global Compact (UNCG) principles or the OECD Guidelines for Multinational Enterprises; (d) that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite; (e) that derive 10% or more of their revenues from the exploration, extraction, distribution or refining of oil fuels; (f) that derive 50% or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels; or (g) that derive 50% or more of their revenues from electricity generation with a GHG intensity of more than 100g CO2 e/kWh.

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