The European Securities and Markets Authority, Esma, in May published its final guidelines on funds’ names using ESG or sustainability-related terms in order to prevent greenwashing risk. These may, potentially, have massive implications for fund managers. This contribution provides an overview and discusses the impact of the Esma guidelines on fund managers.
In order to tackle greenwashing risk in funds, Esma introduced requirements that relate to the name of a fund that uses ESG or sustainability-related terms to align investment characteristics and objectives. For that purpose, Esma has defined six broad categories of key terms related to funds’ names and included non-exhaustive examples of words that would give the investor the impression for a fund to belong to any of these categories that can be summarized as follows:
The use of ESG- and sustainability-related terminology in fund names should be used only when supported in a material way by evidence of sustainability characteristics, or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy and its strategy as described in the relevant fund documentation. For that purpose, the Esma guidelines requires minimum asset allocation and exclusionary criteria to be complied that are summarized in the below table:
Where a fund name combines terms from more than one of the categories mentioned above, the provisions applying to each of those categories should apply cumulatively, except for those terms combined with any transition-related terms, where only the requirements related to “transition-related terms” should apply.
Funds that have designated an index as a reference benchmark can only use the above-mentioned ESG- and sustainability-related words in their name if the above-mentioned requirements related to those “key words” are being complied with by the fund.
Furthermore, funds that use “transition-” or “impact”-related terms in their names should, in addition to complying with the above-mentioned recommendations, ensure that investments 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”.
Application of the Esma guidelines
The Esma guidelines will apply three months after the date of the publication thereof on Esma’s website in all EU official languages. As of the date of application, new funds are expected to apply the ESMA Guidelines immediately. Pre-existing funds are required to comply with the ESMA Guidelines after six months from the application date.
Potential impact on fund managers
The Esma guidelines are very impactful for fund managers and are expected to impact thousands of (European) funds. Albeit the greenwashing objective behind its adoption is to be welcomed, it still leaves open room for interpretation. For example, the mere use of a limited list of (non-exhaustive) examples specifying ESG- and sustainability-related “key terms” in funds’ names may lead to confusions as to the application of the Esma guidelines. In the context of the envisaged revisions of the SFDR and SFDR RTS, it is clear that the Esma guidelines form part of a dynamic EU ESG regulatory framework that continues to evolve.
Sebastiaan Hooghiemstra is a senior associate in the investment management practice group of Loyens & Loeff Luxembourg and Senior Fellow/Guest Lecturer of the International Center for Financial Law & Governance at the Erasmus University Rotterdam. The law firm is a knowledge partner of Investment Officer.
