ESMA issues guidelines on ESG and sustainability-related terms in fund names

Scope and applicability

The guidelines apply to UCITS management companies, Alternative Investment Fund Managers (AIFMs) and other relevant entities. They are designed to ensure that all marketing communications and fund documentation are fair, clear and not misleading.

The guidelines came into effect three months after their publication on ESMA’s website in May 2024. New funds are required to comply from 21 November 2024, while existing funds must comply by the end of the transition period on 21 May 2025.

Purpose of the guidelines

The primary goal is to prevent the misuse of ESG or sustainability-related terminology in fund names, which could result in names that are unfair, unclear, or misleading to investors. A fund’s name is a key source of information for investors and can significantly influence decision-making.

Q&As published by ESMA in late 2024 clarified several aspects of sustainable finance under the SFDR (Sustainable Finance Disclosure Regulation) framework:

• Exclusion rules: Investment exclusions for specific companies do not apply to European Green Bonds. For other green bonds, a “look-through” approach may be used to assess whether financed activities align with exclusion criteria.
• Sustainability threshold: A common understanding among national competent authorities is that funds with less than 50% of their portfolio in sustainable investments are not considered to be meaningfully investing in sustainability.
• Controversial weapons: Exclusions should follow the definition provided in Principal Adverse Impact Indicator 14 under SFDR to ensure consistent application.

Compliance and reporting obligations

Competent authorities and financial market participants are expected to make every effort to comply with the guidelines. Authorities were required to report their compliance status to ESMA within two months of the publication. Financial market participants are not required to report compliance directly; however, they must adhere to the guidelines in practice.

Guidelines on fund naming

Key terms

The guidelines define key terms, including transition, environmental, social, governance, impact, and sustainability. Understanding these definitions is crucial for fund managers seeking to comply with the naming requirements.

Recommendations for fund managers

• Transition, Social, and Governance Terms: Funds using these terms must allocate at least 80% of investments to assets aligned with environmental or social characteristics or sustainable investment objectives. They must also exclude investments in companies listed under Article 12(1)(a) to (g) of CDR (EU) 2020/1818.
• Environmental and Impact Terms: The same 80% investment threshold and exclusion criteria apply.
• Sustainability Terms: Funds must meet the 80% threshold, exclude specified investments, and demonstrate a meaningful commitment to sustainable investments.

Combined terms

Where a fund name includes multiple sustainability-related terms, the requirements for each term apply cumulatively—except where the term “transition” is included, in which case some flexibility may apply.

Supervisory expectations

National competent authorities are expected to monitor compliance throughout the fund’s life cycle. They should investigate inconsistencies and ensure that fund names accurately represent investment strategies and objectives.

Conclusion

These ESG fund naming guidelines represent a significant step by ESMA towards promoting clarity, transparency, and investor trust in sustainable finance. By aligning with these rules, fund managers can reduce the risk of greenwashing and support informed investor decision-making.

This initiative underlines ESMA’s commitment to developing a fair and transparent financial market, particularly as ESG investing and sustainability considerations continue to grow in importance.

How our team can help

At Forvis Mazars, our Prudential Risk experts recognise that evolving regulations remain a key driver of strategic priorities for financial institutions. We support our clients in the financial services sector to navigate the complex regulatory environment, including ESG-related compliance.

We work closely with you to assess your regulatory obligations and implement practical strategies for full compliance with sustainable finance regulations, including ESMA’s fund naming guidelines and the SFDR framework.