The European Securities and Markets Authority (ESMA) has published new guidelines on fund naming. The aim is to protect investors against misleading fund names relating to sustainability and climate.
The naming of funds is a key marketing tool, as a fund's name is often the first information a potential investor will encounter. The new guidelines aim to provide clear criteria for the use of ESG or sustainability-related terms to protect investors against misleading and unsubstantiated marketing of a fund that the investor wants to invest in. The guidelines aim to make it easier for investors to navigate green investment opportunities and avoid 'greenwashing' of a fund that cannot document the sustainability of their investments.
Stricter requirements for fund names
The fund naming guidelines set different requirements depending on the name of the fund. Common to all funds using ESG or sustainability-related terms is that at least 80 % of the investments must support the fund's environmental, social or sustainable investment objectives stated in the fund's investment strategy.
For funds that use terms such as "environmental," "ESG," or "impact," additional exclusion criteria apply according to the EU Paris Aligned Benchmark (PAB). These funds are not allowed to invest in companies with activities relating to the production of controversial weapons, tobacco or companies that derive significant revenues from the extraction and distribution of fossil fuels such as oil and gas. Whereas funds that use terms like "transition," "social" or "governance practices" must instead follow the exclusion criteria of the EU Climate Transition Benchmark (CTB), which also includes bans on investments in controversial sectors such as arms and tobacco.
Funds with sustainability-related terms in their name must ensure that their investments are meaningfully directed towards sustainable investments in accordance with the definition of 'sustainable investments' in Article 2(17) of the EU Disclosure Regulation. The assessment of whether the name of the fund is misleading is based on what expectations an investor could reasonably have of the fund based on its full name. In assessing what is considered meaningful, it is the name of the fund as a whole that is assessed.
For funds that use combined terms such as both "environmental" and "social", the requirements apply cumulatively, which means that the fund must fulfil the conditions for both categories. Finally, funds using impact-related terms in the name must ensure that the fund's investments have a positive and measurable impact, while funds using transition-related terms in the name must ensure that the investments contribute to a social and environmental transition and that the path towards this is measurable.
Entry into force of ESMA's new guidelines
The new guidelines obligate national supervisory authorities, including the Danish Financial Supervisory Authority, to incorporate the rules into their supervisory systems and ensure that funds comply with the requirements of the ESMA guidelines.
The EMSA guidelines enter into force on 21 November 2024 for funds established after that date. For funds established before 21 November 2024, the guidelines will only enter into force from 21 May 2025.
ESMA's guidelines can be read here.