On 14 May 2023, the European Securities and Markets Authority (ESMA) published the Final Report containing Guidelines on funds’ names using ESG or sustainability related terms. The Final Report follows a public consultation which ran from 18 November 2022 to 20 February 2023 and a statement on 14 December 2023.

The objective of the Guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability related terms in fund names.

ESMA reports that it received significant input from stakeholders to its consultation paper and that in the Final Report it has adjusted the Guidelines in several areas.

Such amendments include removing the 50% threshold for sustainable investments as this measure was criticised by stakeholders because the definition of Article 2(17) of the Sustainable Finance Disclosure Regulation is considered too open to discretion by fund managers to function effectively as a specific threshold. However, the 80% threshold related to the investments used to meet environmental and/or social characteristics or sustainable investment objectives has been retained and has been applied to all terms in the Guidelines.

To reflect consultation feedback, the provisions for transition-related terms in fund names require, in addition to the 80% threshold, the application of Climate Transition Benchmark (CTB) exclusions only. This category of terms is intended not to penalise investment in companies deriving part of their revenues from fossil fuels. The transition-related terms include words such as “improving”, “progress/ion”, “evolution”, “transformation”, and any related words.

ESMA has also separated the terms related to social (S) and governance (G) from environmental (E) terms. The social and governance terms are included in the same group as the transition terms, allowing funds with those terms in their name to apply the CTB exclusions only. Environmental terms should still only be used by funds applying the Paris-aligned Benchmarks exclusions. The commonly used “ESG” and “SRI” abbreviations would still be considered environmental terms.

Next steps

The Guidelines will be translated into all EU languages and will subsequently be published on ESMA’s website. They will start applying three months after that publication.

The transitional period for funds existing before the application date will be six months after that date. Any new funds created after the application date should apply the Guidelines immediately in respect of those funds.