Harmonised criteria for ESG and sustainability terms in fund names
The European Securities and Markets Authority (“ESMA”) has published the final report on fund names guidelines. The aim is to prevent “greenwashing” by ensuring that environmental, social and governmental (“ESG”) criteria and sustainability terms used in fund names are backed by substantial evidence of sustainability characteristics or objectives. These guidelines, are intended to enhance investor protection and provide clear criteria for asset managers.
Key guidelines overview
- Minimum investment thresholds
- Funds using sustainability, environmental or impact related terms in their names must allocate at least 80% of their investments to meet environmental or social characteristic or sustainable investment objectives in accordance with the binding elements of the investment strategy.
- Funds using sustainability-related terms should, in addition, commit to invest meaningfully in sustainable investments.
- Funds using “transition or impact related terms in their names should also ensure that investments used to meet the 80% threshold referred to above 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.
- Exclusions
- Funds using transition, social and governance, sustainability or impact related terms should exclude investments in companies involved in activities related to controversial weapons, or in the cultivation and production of tobacco or companies that benchmark administrators find in violation of the UN Global Compact principles or the OECD Guidelines for Multinational Enterprises.
- In addition, funds using environmental, sustainability or impact related terms in their names should exclude certain investments in companies with activities relating to hard coal and lignite, oil fuels, gaseous fuels and that derive 50% or more of their revenues from electricity generation with GHG intensity above a certain threshold.
Consultation feedback and amendments
ESMA's consultation of November 2022 received 125 responses from asset managers, NGOs, and consumer representatives. Based on this feedback, several amendments were made, including:
- Removal of the 50% threshold for sustainable investments for the use of sustainability-related words in funds’ names.
- Introduction of a commitment to invest “meaningfully” in sustainable investments; and
- Adjustment of exclusion criteria to accommodate transition-focused strategies.
Next steps and implementation
The guidelines will be translated into all EU languages and published on ESMA's website. The guidelines will apply three months after publication of the translations. New funds created after the application date should apply the guidelines immediately, while existing funds have a six-month transitional period.
Competent authorities must notify ESMA within two months whether they comply, intend to comply, or do not intend to comply with the guidelines.
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