The recent ESMA Final Report on the Guidelines for funds’
names using ESG or sustainability-related terms (the
“Guidelines”) marks a critical moment for asset managers.
These Guidelines aim to clarify when the use of ESG or
sustainability-related terms in fund names may be deemed unfair,
unclear or misleading. The Guidelines introduce minimum asset
allocation thresholds, exclusionary criteria and additional
criteria which vary depending on the specific ESG or sustainability
terms used in the name. Navigating these rules requires a solid
grasp of regulatory frameworks and thoughtful strategic
adjustments.
The Guidelines apply to all alternative investment funds
(“AIFs”) managed by EU-based alternative investment fund
managers (“AIFMs”), as well as UCITS managed by UCITS
management companies. ESMA estimates that around 1,700 EU-domiciled
AIFs will be impacted by these new rules.
For funds with names that include terms such as
“transition,” “social,” “governance,”
“environmental impact” or “sustainability” (or
derivatives of these words), the Guidelines outline specific
requirements. There is no exhaustive list of names that trigger the
rules, sofund managers must use their judgment to assess whether
their funds fall within the scope.
These Guidelines reflect the EU’s push for greater
transparency, accountability and consistency in how ESG funds are
marketed. Funds with ESG-related names must now ensure that at
least 80% of their assets are aligned with the binding elements of
their investment strategy. This rule ensures that funds are
genuinely committed to their ESG objectives, rather than using the
ESG label superficially.
The Guidelines mandate the application of two sets of
exclusionary criteria depending on the type of ESG fund. Funds that
focus on climate transition, social and governance issues will need
to adhere to the Climate Transition Benchmark exclusionary
criteria. Meanwhile, funds with names linked to environmental
sustainability or impact will also have to follow the additional
exclusionary criteria outlined in the Paris-Aligned Benchmark.
Additionally, any fund that uses “transition” or
“impact” in its name must demonstrate a clear, measurable
path toward achieving a positive social or environmental
transition. This should include a goal to create measurable social
or environmental impact alongside financial returns. Similarly,
funds with sustainability-related names are required to
“meaningfully” invest in sustainable investments, as
defined under Article 2(17) SFDR.
Although it is clear that these Guidelines apply to fund managed
by EU-AIFMs, it remains uncertain whether non-European AIFMs
marketing their funds within the EEA under the national private
placement regime (NPPR) will also be affected. Another grey area is
how strictly EEA regulators will apply the Guidelines to
closed-ended funds that are no longer open for new
distribution.
For many asset managers, these Guidelines signify a shift from
voluntary ESG commitments to stricter regulatory obligations.
Complying with these rules will require more than basic adherence;
it will demand strategic foresight and an understanding of evolving
market trends.
We recommend that asset managers monitor how the Guidelines are
implemented by EEA Member States to gain clearer insight into the
level of enforcement. This is especially important for non-European
asset managers and closed-ended funds that had their final
closing.
For EU-AIFMs, it’s advisable to integrate these Guidelines
into their strategic planning, particularly if they intend to use
ESG or sustainability-related fund names. Non-European AIFMs
marketing closed-end funds under the NPPR in the EEA should also
aim for compliance where feasible.
As ESG continues to reshape global financial markets, asset
managers who successfully navigate these regulatory changes will be
well-positioned to lead in a more sustainable financial future.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.