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ESMA Guidelines on Fund Names: ESG and Sustainability-Related Terms

The European Securities and Markets Authority (ESMA) has issued comprehensive guidelines regarding the utilization of environmental, social, and governance (ESG) or sustainability-related terminology in fund titles. These guidelines, which follow a consultation paper from November 2022, are designed to safeguard investors by tackling the escalating concerns surrounding greenwashing. This deceptive practice involves funds portraying themselves as sustainable or ESG-focused without substantiating these assertions through their genuine investment activities.



The guidelines by ESMA have outlined specific terms, including those related to transitions, encompassing phrases derived from "transition" and associated concepts like "enhance" and "advance"; terms related to the environment, covering words such as "green," "environmental," "climate," as well as acronyms like "ESG" and "SRI"; terms relating to social aspects, incorporating words like "social" and "equality"; terms associated with governance, consisting of words like "governance" and "controversies"; terms linked to impact, including those derived from "impact," such as "impacting" and "impactful"; and terms related to sustainability, involving phrases derived from "sustainable," like "sustainably" and "sustainability."


With regards to recommendations for fund managers, funds using the term:

  • Transition-, Social-, and Governance-Related Terms: Funds using these terms are required to allocate a minimum of 80% of their investments towards meeting environmental or social criteria or sustainable investment goals. Moreover, they must refrain from investing in certain companies as specified in Article 12(1)(a) to (c) of CDR (EU) 2020/1818.

  • Environmental- or Impact-Related Terms: Funds utilizing these terms must also adhere to the 80% investment threshold and avoid investing in companies listed in Article 12(1)(a) to (g) of CDR (EU) 2020/1818.

  • Sustainability-Related Terms: These funds must meet the 80% investment requirement, exclude specific companies, and commit to substantial investments in sustainable ventures as defined by Article 2(17) of the SFDR.


Furthermore, in accordance with the guidelines, competent authorities are tasked with ensuring adherence to these guidelines throughout the fund's lifecycle. Investors can verify compliance through regular disclosures mandated by CDR (EU) 2022/1288. Any temporary deviations from thresholds or exclusions should be considered passive violations and promptly rectified. Authorities are expected to investigate and engage in supervisory discussions with fund managers in cases of discrepancies in quantitative thresholds, inadequate investment levels, or deceptive use of ESG-related terms in fund titles.


The ESMA guidelines carry significant implications for fund managers, particularly those overseeing or intending to launch ESG or sustainability-focused funds. Managers must guarantee compliance by adjusting investment strategies, enhancing transparency, and refining reporting procedures. This involves evaluating and potentially renaming existing funds with ESG or sustainability-related terms if they fall short of the new standards.


Operationally, managers will need to establish new protocols to accurately monitor and report ESG metrics, which could result in additional expenses. Clear communication with investors is vital to clarify these adjustments and update relevant documentation. Additionally, managers must conduct more thorough due diligence on potential investments to ensure they align with the specified ESG criteria.


In conclusion, the ESMA expects the guidelines to be implemented by managers of new funds created after the publication date, three months after the application date. Old funds existing before the release should follow the guidelines six months after the application date. Moreover, all UCITS management companies must comply with this guideline. For a better comprehension of the Legislative references, abbreviations, and definitions outlined in this guideline, we recommend reading the final report guidelines on funds names  and following the European Security and Markets Authority.  



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