Guidelines on ESG Fund Names
The European Securities and Markets Authority (ESMA) releases guidelines on ESG fund names, aiming to provide clear and measurable standards for asset management companies to use ESG or sustainability-related terms in fund names and avoid greenwashing.
The ESMA updated the naming rules for ESG funds in December last year, requiring asset management companies to reflect sustainable characteristics in the investment objectives and assets held by ESG funds. The guidelines released this time is the final version and will become the regulatory basis for existing funds and subsequent new funds.
Related Post: European Securities and Markets Authority Updates ESG Fund Naming Rules
Background of Guidelines on ESG Fund Names
Fund name is an important tool for the fund to convey information to investors. It is usually the first feature of the fund that investors pay attention to and will have a significant impact on investors’ decision-making. The European Securities and Markets Authority believes that as investors’ interest in sustainable asset allocation grows, market pressure may prompt asset managers to add ESG or sustainability-related terms to fund names to attract investors, and in some cases lead to greenwashing.
ESMA also cites some EU regulations in the document. For example, the EU Undertakings for Collective Investment in Transferable Securities Directive (UCITS Directive) stipulates that EU member states must ensure that asset management companies act honestly and fairly when conducting business to secure best interests of UCITS and maintain market integrity. The Alternative Investment Fund Managers Directive (AIFMD) also requires alternative investment fund managers to conduct their activities honestly, prudently, diligently and publicly.
In April this year, amendments to the EU’s UCITS Directive and AIFMD came into effect, requiring the European Securities and Markets Authority to develop guidelines to where the name of an UCITS or AIF is unclear, unfair or misleading.
Contents of Guidelines on ESG Fund Names
The guidelines on ESG fund names apply to UCITS management companies and alternative investment fund managers, aiming to clarify situations where the use of ESG or sustainability-related terms in funds is unclear, unfair or misleading. All member states are required to incorporate the guidelines into their regulatory framework and monitor market participants for compliance. If a member state’s supervisory authority does not intend to comply with the guidelines, it will need to notify the reasons within two months from the date of publication of the guidelines.
The guidelines’ requirements for fund names are as follows:
- Funds that use environmental, social, governance, transition or impact-related terms are required to invest at least 80% of the fund in assets that meet environmental, social or sustainable investment objectives, and exclude companies mentioned in Article 12 of Commission Delegated Regulation. This regulation is aligned with the minimum standards of the EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks.
- Funds that use sustainability-related terms are required to invest at least 80% of the fund in assets that meet environmental, social or sustainable investment goals, while excluding controversial companies involved in Article 12 of Commission Delegated Regulation, and commit to Make meaningful investments in sustainable assets in Article 2 of Sustainable Finance Disclosure Regulation (SFDR).
- Funds that use transition or impact-related terms need to ensure that their investments have clear and measurable environmental or social transition characteristics, or can generate positive and measurable environmental or social impacts while obtaining financial returns.
The European Securities and Markets Authority will publish ESG fund naming guidelines on its website in all EU languages, and the guidelines will take effect three months from the date of publication. After the guidelines come into effect, all newly established funds must immediately comply with the guidelines’ requirements, and previously established funds will need to adjust their fund names within six months after the guidelines take effect.
Reference:
ESMA Guidelines Establish Harmonised Criteria for Use of ESG and Sustainability Terms in Fund Names
