ESG Fund Names: New Regulatory Guidance and Fast-Track Procedure to Ensure Compliance by 21 May 2025

On 21 October 2024, the Commission de Surveillance du Secteur Financier (CSSF) implemented the European Securities and Markets Authority (ESMA) Guidelines regarding environmental, social, and governance (ESG) fund naming as part of its administrative practice. Circular CSSF 24/863 aims to standardize ESG and sustainability terminology in fund names, setting clear compliance expectations to prevent greenwashing and enhance investor transparency while offering a fast track process to ensure compliance by regulated funds.

Scope and Application of Circular CSSF 24/863

Circular 24/863 establishes obligations for various types of Luxembourg fund management entities and their associated investment funds, extending its scope to the following:

1. In-scope management entities:

• UCITS management companies: Both UCITS management companies and UCITS funds that have not designated a UCITS management company
• Alternative investment fund managers (AIFMs), which include:
  • Those registered under the de minimis regime governed by article 3 of the AIFMD¹ managing alternative investment funds (AIFs)
  • Fully authorized AIFMs
  • Internally managed AIFs
  • Non-EU AIFMs relying on article 42 AIFMD for the private placement of their EU and non-EU AIFs in Luxembourg²
• Other fund managers managing 
  • European Venture Capital Funds (EuVECA)
  • European Social Entrepreneurship Funds (EuSEF)
  • European Long-Term Investment Funds (ELTIF)
  • Money market funds

2. In-scope funds:

• Applies to funds and, in the case of umbrella structures, sub-funds. A reference to “funds” in this document should be deemed to include sub-funds
• Applies to both open-ended and closed-ended funds, including those closed-ended funds that had already terminated their subscription period before the deadlines specified in the circular
• Applies to funds that disclose under articles 6, 8, or 9 SFDR³

3. Scope of obligations:

• Fund documents: Obligations impact the preparation and content of fund documents.
• Marketing communications: The circular also sets guidelines for marketing communications related to these funds.
• Ongoing compliance: All applicable thresholds and exclusions foreseen in the ESMA Guidelines shall be complied with on an ongoing basis.
• Depositary oversight: The depositary bank will be in charge of the independent monitoring of the compliance with the ESMA Guidelines by virtue of the depositary oversight role.

The compliance deadlines are:

• As of 21 November 2024, for new funds and sub-funds created after this date
• From 21 November 2024 until 21 May 2025 for existing funds and sub-funds

ESG Naming Standards and ESMA Q&A clarifications

The ESMA framework defines six primary ESG categories for fund names:

1. Transition: Includes terms derived from “transition” (e.g., “transitioning,” “transitional”) and related concepts such as “improve,” “progress,” “evolution,” “transformation,” and “net-zero”
2. Environmental: Terms that suggest the promotion of environmental characteristics (e.g., “green,” “environmental,” “climate”) and may include abbreviations such as “ESG” and “SRI”
3. Social: Terms suggesting a focus on social characteristics (e.g., “social,” “equality”)
4. Governance: Terms that imply a focus on governance (e.g., “governance,” “controversies”)
5. Impact: Terms derived from “impact” (e.g., “impacting,” “impactful”)
6. Sustainability: Terms based solely on “sustainable” (e.g., “sustainably,” “sustainability”)

The ESMA further distinguishes three categories, requiring funds to meet an 80% ESG investment threshold based on their specific focus, as per the binding elements of the investment strategy outlined in Annexes II and III of Commission Delegated Regulation (EU) 2022/1288 (SFDR Level 2):

• Transition, social, and governance funds: Must exclude investments in companies specified in Article 12(1)(a) to (c) of CDR (EU) 2020/1818 (the EU Climate Transition Benchmark, or CTB)
• Environmental and impact funds: Must exclude investments in companies specified in Article 12(1)(a) to (g)⁴ of CDR (EU) 2020/1818 (the EU Paris-aligned Benchmark, or PAB)
• Sustainability funds: Must exclude investments in companies specified in Article 12(1)(a) to (g) of CDR (EU) 2020/1818 (i.e., the PAB exclusions) and commit to invest “meaningfully” in sustainable assets as defined in Article 2(17) of the SFDR. The ESMA Q&A confirmed that funds with “sustainable” terms in their names investing less than 50% of the proportion of investments in sustainable investments are not “meaningfully investing in sustainable investments.” That amount could be higher, subject to the circumstances of the case that are left at the appreciation of the local regulators. In this regard, the CSSF requires fund managers to include a description of their assessment and rationale used for the determination of a “meaningful” proportion of sustainable investments of the fund in the confirmation letter. Funds using names with multiple qualifications must adhere to the cumulative requirements. Additionally, funds with “transition” or “impact” terminology must ensure their investments are directed toward clear, measurable social or environmental transitions and aim to generate positive social or environmental impacts alongside financial returns.

The ESMA Q&A further clarified that when applying Article 12(1)(a) of CDR (EU) 2020/1818 (companies involved in any activities related to controversial weapons), national competent authorities may refer to the list of controversial weapons provided in indicator 14 of Table 1 of Annex I of SFDR Level 2.

CSSF Filing Procedures for Fund’s Documentation

The CSSF has introduced a Priority Processing Procedure (PPP) or fast track procedure for regulated existing funds. This procedure allows for streamlined updates to the fund documents, focusing solely on compliance changes required under the guidelines. Amendments should be limited to changes in fund names (or at least one sub-fund) and minor adjustments regarding ESG engagements or SFDR precontractual disclosures. Any change other than minor adjustments or outside of Circular 24/863 cannot beneficiate from the PPP. The offering memorandum of closed-ended funds that are no longer accepting subscriptions should in principle be amended only with respect to the fund name. Please reach out to our experts to discuss how to address this matter and explore the options that are available.

Supervisory Expectations and Self-Assessment

The CSSF requires fund managers to conduct a self-assessment, irrespective of their SFDR disclosure articles (6, 8, or 9), to ensure:

• Fund names are accurate and not misleading.
• Adequate disclosures are included in prospectus or offering memorandum, precontractual disclosure, and/or on website to support ESG or sustainability terms.
• Market participants review their funds’ names for compliance on a case-by-case basis.
• Ongoing monitoring and adaptation to further developments in this field occurs.

Recommended Actions for Concerned Fund Managers

• For new funds and sub-funds (whether regulated or not), ensure that the fund/sub-fund documentation (e.g., issuing document, articles of association, limited partnership agreement) is compliant with ESMA guidelines from their creation.
• For existing funds and sub-funds (whether regulated or not), review the fund documentation so as to ensure compliance by 25 May 2025. For regulated funds only, this implies that the CSSF PPP filing should be done prior to that date. 
• Use the PPP procedure for regulated investment funds to ensure compliance for existing funds. 
• Ensure that all marketing communications, as well as any Key Investor Information Document (KIID), Packaged Retail, and Insurance-based Investment Products (PRIIPs KID), if any, are in line with updated fund documentation on the guidelines on fund naming.

Conclusion

CSSF Circular 24/863 reinforces Luxembourg’s commitment to transparency in ESG investing, curbing greenwashing while enhancing investor protection. By aligning fund naming practices with ESMA’s guidelines, Luxembourg fund managers can bolster compliance, enhance investor confidence, and solidify their position in sustainable finance.

 

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^[1] Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers, as amended.
^[2] We consider that non-AIFMs relying on Article 42 AIFMD are in the scope considering that this article cross-refers to article 23 AIFMD, on the basis of which ESMA issued its guidelines. 
^[3] The CSSF updated its Q&A on Sustainable Finance Disclosure Regulation (SFDR) on 18 December 2024 and confirmed this point.
^[4] Article 12(1)(a)-(g) of the Benchmark Regulation: (a) companies involved in any activities related to controversial weapons; (b) companies involved in the cultivation and production of tobacco; (c) companies that benchmark administrators find in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises; (d) companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution, or refining of hard coal and lignite; (e) companies that derive 10% or more of their revenues from the exploration, extraction, distribution, or refining of oil fuels; (f) companies that derive 50% or more of their revenues from the exploration, extraction, manufacturing, or distribution of gaseous fuels; and (g) companies that derive 50% or more of their revenues from electricity generation with a greenhouse gas intensity of more than 100g CO2 e/kWh.

 

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