Conditions for using the ESG acronym and terms related to sustainability in fund names
Recently, there has been a rapid increase in investor demand for investment funds that take ESG (Environmental, Social, Governance) into account.
According to the EU, competitive pressures in the market create incentives for asset managers to include terminology in their fund names to attract investor assets.
On 14 May 2024, the European Securities and Markets Authority (“ESMA”) issued a final report containing guidance on the conditions under which funds may use the ESG acronym and other sustainability-related terms (e.g. green, climate, equality) in their names. According to the guidelines, funds may only refer to themselves by ESG terms if at least 80% of the fund’s investments are in line with the fund’s environmental and social performance or sustainable investment objectives as set out in the fund’s investment strategy.
The investment strategy of the fund so labelled must also comply with the restrictions under Commission Delegated Regulation (EU) 2020/1818 of 17 July 2020, regulating minimum standards for EU benchmarks for climate-related economic transformation and EU benchmarks linked to the Paris Agreement.
ESMA’s issuance of the guidelines is motivated by the desire to combat greenwashing, i.e. the practice whereby some investment fund managers, in an attempt to increase the attractiveness of certain products, label as sustainable also funds whose investment strategies cannot be considered sustainable within the meaning of European regulation in this area.
Once the guidelines have been translated into the languages of all Member States, there will be a two-month period within which the competent authorities of the Member States must notify ESMA whether they comply with the guidelines or intend to comply with them. The guidelines (subject to certain transitional provisions) will enter into force 3 months after the publication of all translations on ESMA’s website.
