The European Securities and Markets Authority (ESMA) has developed new guidelines on the use of fund names, which have been translated into all official EU languages. The guidelines apply to funds that include ESG (environmental, social, and governance)-related terms in their names. The aim of the guidelines is to ensure that these funds pursue an investment strategy with minimum criteria and provide investors with clear and transparent information about their ESG performance.
scope and deadlines
The new guidelines are aimed primarily at alternative investment fund managers (AIFMs), including internally managed funds. Effective today, November 21, 2024, all new funds launched after this date must comply with the name-related requirements. A transitional period applies to existing funds: They must implement the guidelines by May 21, 2025, at the latest (six-month deadline). National supervisory authorities, such as BaFin, will ensure compliance by fully applying the guidelines.
Requirements for the use of ESG terms
The ESMA guidelines define clear requirements for the use of ESG terms in fund names. Funds that have terms such as "sustainable", "green" or "social" in their name must ensure that at least 80% of their investments comply with the environmental, social or governance-related objectives set out in the SFDR (Sustainable Finance Disclosure Regulation) and the associated Delegated Acts (CDR). There are different categories of ESG terms, E/S/G-related, sustainability-related, transformation-related and impact-related terms. Funds must exclude companies that violate certain exclusion criteria set out in EU Regulation 2020/1818 (Benchmarks Regulation), for example in relation to fossil fuels or controversial weapons. The scope of the exclusion criteria depends on the ESG term used.
Specifically, there are exclusion criteria that are based on the Climate Transition Benchmark (CTB) or the Paris Aligned Benchmark (PAB).
CTB exclusion criteria:
- Companies involved in activities related to controversial weapons
- Companies involved in the cultivation and production of tobacco
- Companies that, in the opinion of the benchmark administrators, violate the principles of the United Nations Global Compact (UNGC) or the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises
PAB exclusion criteria:
- Companies that generate 1% or more of their revenues from the exploration, mining, production, distribution or refining of hard coal and lignite
- Companies that derive 50% or more of their revenues from the exploration, production, production or distribution of gaseous fuels
- <span data-metadata=""><span data-buffer="">Companies that derive 50% or more of their revenues from the exploration, production, production or distribution of gaseous fuels
- Companies that generate 50% or more of their revenue from electricity generation with a GHG emission intensity of more than 100 g CO2 e/kWh
| Fund name with reference to the following terms | Social / Governance | Transformation | Environment | impact | Sustainability |
|---|---|---|---|---|---|
| Achievement of a threshold of 80%, tied to investments with a sustainable objective |  | | | | |
| Minimum exclusions according to CTB | | | |||
| Minimum exclusions according to PAB | | | |
||
| Commitment to significant sustainable investments | |
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| Ensuring measurability | | |
special feature "Transition"
For "transition funds", only the CTB exclusions need to be taken into account, which means that these funds are intended to achieve change with the money invested and there should be no restrictions in this regard. For example, investments should be possible in companies that still have a high GHG emission intensity in electricity generation, with targeted improvement measures promoting more sustainable and energy-efficient solutions.
This relaxation of the exclusion criteria for transition funds is linked to the obligation to present a clear and measurable "transition path" (the same obligation applies to impact funds). It is not specifically determined what such a transition path should look like. Accordingly, there is no specification for the transition path and instead it can be determined individually. It therefore depends crucially on the projects and objectives of the fund, which must promote the intended transition in a comprehensible and verifiable way (e.g. through the science-based targets).
Conclusion
ESMA's new guidelines create clear rules for the use of ESG-related terms in fund names and offer investors more transparency and protection against misleading names. Fund managers must ensure that their investment strategies comply with the standards set out in the guidelines in order to avoid legal consequences. The requirements for the traceability and measurability of investment objectives are particularly important, especially with regard to transition projects and compliance with sustainability criteria. BaFin will examine these points without restriction, as set out above.
How can we support?
Companies that familiarize themselves with ESMA's guidelines and align their sustainability efforts accordingly will not only meet the new requirements, but can also benefit from increased trust from investors and stakeholders. The naming regulations are closely linked to the requirements for sustainability-related disclosures under the SFDR. We can also support you in this regard.
With over 100 years of consulting experience, we not only offer a 360° approach, but also a dynamic ESG team dedicated to fund advice. Our interdisciplinary teams combine expertise and technology to deliver customized solutions. We understand the complexity of the SFDR requirements in the context of ESMA's requirements and offer tailored strategies to implement them effectively.
We'll work with you to ensure successful implementation and execution. Contact us!
