CSSF’s communication on ESMA final report on guidelines on funds’ names using ESG and sustainability-related terms

On 15 May 2024, the Commission de Surveillance du Secteur Financier (the “CSSF”) published a communication related to the European Securities and Markets Authority (“ESMA”)’s final report on the guidelines on funds’ names using ESG and sustainability-related terms (the “CSSF Communication”).

In line with its confirmation that funds’ names are a powerful marketing tool that should not mislead investors, ESMA conducted a consultation targeted to the funds’ names using ESG and sustainability-related terms that closed on 20 February 2023 (the “Consultation”).

As the investment funds industry had been waiting for the guidelines resulting from the Consultation, ESMA published a public statement of 14 December 2023 in which it already stated that the requirements in relation to funds’ name would differ from what was expected from the Consultation.

In this context, ESMA published, on 14 May 2024, its final report which includes the long-awaited guidelines on funds’ names using ESG and sustainability-related terms (the “Guidelines”).

These Guidelines enhance the willingness of the EU regulators to mitigate the risk of greenwashing in the European market by introducing specific criteria applicable to a large majority of funds, in relation to their portfolio and investment strategies to ensure consistency and avoid misleading claims.

Scope and context

The Guidelines will be applicable to:

  • UCITS management companies, including any UCITS which had not designated a UCITS management company,
  • Alternative Investment Funds Managers including internally managed alternative investment funds (“AIFs”), EuVECA, EuSEF and ELTIF and MMFs managers, and
  • national competent authorities (“NCAs”).

These Guidelines are applied in relation to the obligation of investment funds managers (“IFMs”) to act honestly and fairly in conducting their business, as well as the obligation that all information included in marketing communications is fair, clear and not misleading[1].

It is to be noted that the Guidelines are relevant to all fund documentation and marketing communications addressed to investors and potential investors of the relevant managed funds.

Although debated by the market actors in response to the Consultation, ESMA confirms that the Guidelines will apply to both open and closed-ended funds and without any distinction on the type of investors they are targeting.

In addition, the CSSF Communications confirms that the Guidelines are applicable to all IFMs managing UCITS or AIFs, irrespective of whether they are disclosing under Article 6, Article 8 or Article 9 SFDR[2] and that IFMs are thus required to carry-out a self-assessment on whether the Guidelines are applicable to the funds that they manage.

Clarification on ESG and sustainability-related terms

The Guidelines apply to funds’ names using the following terms:

  • Transition”-related terms which encompass any terms derived from the base word “transition and those terms deriving from “improve”, “progress”, “evolution”, “transformation”, “net-zero”, etc.
  • Environmental”-related terms mean any words giving the investor any impression of the promotion of environmental characteristics, e.g., “green”, “environmental”, “climate”, etc. ESMA clarifies that these terms may also include “ESG” and “SRI” abbreviations.
  • Social”-related terms mean any words giving the investor any impression of the promotion of social characteristics, e.g., “social”, “equality”, etc.
  • Governance”-related terms mean any words giving the investor any impression of a focus on governance, e.g., “governance”, “controversies”, etc.
  • Impact”-related terms mean any terms derived from the base word “impact”
  • Sustainability”-related terms mean any terms only derived from the base word “sustainable”, e.g., “sustainably”, “sustainability”, etc

A fund with a name using several terms from different categories would have to comply with the Guidelines by applying the rules pertaining to each category cumulatively, except if one of the term is a “transition-“related term in which case, only the criteria related to transition-related names should be applied by the fund.

Common rules: minimum threshold and exclusion lists to be complied with

Any funds with a name using any of the terms set out above covered by the Guidelines would have to comply with:

(i) a minimum of 80% threshold of investments used to meet the environmental or social characteristics promoted by the fund or sustainable investment objective of the fund, in accordance with the binding elements of the investment strategy and

(ii) the application of exclusions from the Paris-aligned Benchmarks rules set out in Article 12(1) of Delegated Regulation (EU) 2020/1818 (the “Delegated Regulation”).

Following the feedback received from the Consultation, ESMA adapted the specific exclusion criteria to the strategy of the fund. As a result, the funds using “transition-“, “social-“ and “governance-“ related terms would not have to comply with the exclusions related to environmental impacts, but only with the exclusions listed under points (a) to (c) of Article 12(1) of the Delegated Regulation which are the exclusions applied for EU Climate Transition Benchmarks.

Additional rules for specific funds

Sustainability-related terms: in addition to the common rules above, funds having a “sustainability”-related term in their names would have to commit to invest meaningfully in sustainable investments referred to in Article 2(17) of the SFDR. Without further clarifications from ESMA or the CSSF on the expectations around the term “meaningfully”, the extent to which this criterion is met by the fund would be left at the discretion of the IFM.

Transition- and impact-related terms: in addition to the common rules above, funds having a “transition”- and “impact”-related terms in their names would have to make sure that the investments used to meet the 80% threshold 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.

Funds designated an index as a reference benchmark: when funds having names using any of the ESG- or sustainability-related terms have designated an index as a reference benchmark, the IFM should make sure that the requirements set out in the Guidelines are complied with by the fund itself. For instance, it would likely mean that the IFM should verify that the exclusions on which the index is based meet the exclusion criteria from the Guidelines.

Supervisory expectations

NCA are required to notify ESMA whether they (i) comply, (ii) do not comply, but intend to comply, or (iii) do not comply and do not intend to comply with the Guidelines.

NCA complying the Guidelines would be expected to verify their application with the information provided in the periodic reports prepared in line with SFDR. More specifically, NCA should bring a particular attention to:

  • any discrepancies in the thresholds which are not passive breach,
  • a fund which does not demonstrate a sufficiently high level of investments to use the ESG or sustainability-related term,
  • situations where the NCA considers that using ESG or sustainability-related terms would result in investors receiving unfair or unclear information or in a failure of the manager to act honestly or fairly and thus misleading investors.

It is to be noted that a temporary deviation from the criteria set out in the Guidelines should be treated as a passive breach and corrected in the best interest of the investors.

Next steps

Although most of the points raised in the Consultation by the respondents have been answered by ESMA in its final report, some elements might require additional clarifications on how IFMs can apply the Guidelines.

As a next step, the Guidelines will be translated into the EU languages and published on ESMA website. The Guidelines will be applicable three months after such publication, with a six-month transition period for existing funds.

The CSSF Communication likely confirms the compliance of the CSSF with these Guidelines and its expectations from the IFMs to make their self-assessment on whether the funds that they manage are impacted and compliant with the Guidelines.

IFMs should start considering the extent of work that would be required in the transition period to bring products and in the ongoing compliance monitoring required by the Guidelines.

 Our experts Aurélien Hollard, Julie Pelcé, Clémence Richard and Julien Robert are monitoring further developments very closely and are happy to answer any questions you may have.

[1] in relation to Article 14(1)(a) of Directive 2009/65/EC, Article 12(1)(a) of Directive 2011/61/EU and Article 4(1) of Regulation (EU) 2019/1156.

[2] Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector