ESMA’s new translations
August 23, 2024
The European Securities and Markets Authority (ESMA) has announced the publication of the official translations of its Guidelines on the use of Environmental, Social, and Governance (ESG) or sustainability-related terms in the names of UCITS (Undertakings for Collective Investment in Transferable Securities) and AIF (Alternative Investment Funds). These guidelines were initially published on August 21, 2024, and form part of ESMA's broader effort to enhance transparency, clarity, and consistency in financial market practices within the European Union.
The primary aim of the guidelines is to prevent the use of misleading or ambiguous fund names that incorporate ESG or sustainability-related terminology. The guidelines are designed to ensure that such terms, when employed, accurately reflect the underlying investment strategies of the fund, rather than serving as mere marketing tools. In doing so, ESMA seeks to safeguard investor interests by promoting clear, fair, and non-misleading communication in fund documentation and marketing materials.
The guidelines apply to UCITS management companies, AIF managers, and other investment vehicles such as EuVECA (European Venture Capital Funds), EuSEF (European Social Entrepreneurship Funds), ELTIF (European Long-Term Investment Funds), and MMFs (Money Market Funds). Specifically, these guidelines relate to the obligation under Article 14(1)(a) of Directive 2009/65/EC and Article 12(1)(a) of Directive 2011/61/EU to act fairly and ensure that marketing communications are not misleading.
The guidelines apply three months following their publication in all official EU languages. Newly established funds must comply immediately upon the guidelines’ effective date, while existing funds are granted a six-month grace period to align with the new standards.
Fund names incorporating terms such as “ESG,” “sustainability,” “transition,” or “impact” must meet specific investment thresholds. For example, funds using ESG or sustainability-related terms must ensure that at least 80% of the fund’s investments are directed towards environmental or social objectives, as outlined in the binding elements of the fund’s investment strategy under Commission Delegated Regulation (EU) 2022/1288. Furthermore, such funds must exclude investments in certain industries or sectors, including those related to fossil fuel extraction, as specified in Article 12 of Commission Delegated Regulation (EU) 2020/1818.
Funds using terms such as “transition” or “impact” must demonstrate that their investments are aligned with clear and measurable social or environmental objectives. This is essential to ensure that these terms are not used loosely but reflect a commitment to meaningful outcomes in sustainability and governance. ESMA highlights the need for fund managers to provide investors with measurable results, ensuring that the claimed objectives are genuinely pursued.
The guidelines place a significant emphasis on continuous compliance. Competent authorities are expected to supervise funds throughout their lifecycle, ensuring ongoing adherence to the stipulated thresholds and exclusions. Temporary deviations from these thresholds, provided they are passive and not intentional, are permissible but must be corrected promptly in the best interest of investors.
Under Article 16(3) of the ESMA Regulation, competent authorities and financial market participants must make every effort to comply with the guidelines. Within two months of the publication of the guidelines in all official languages, national competent authorities are required to notify ESMA whether they comply with the guidelines, intend to comply, or do not intend to comply. Financial market participants, however, are not required to report compliance directly to ESMA.
These guidelines represent a significant step towards greater clarity and consistency in the use of ESG and sustainability-related terms in fund names across the EU. By establishing clear thresholds and expectations for fund managers, ESMA seeks to protect investors and enhance the integrity of sustainable finance. The publication of the official translations further facilitates the uniform application of these guidelines across all EU member states, promoting a harmonized approach to sustainable investing.
For further details, you can access the full guidelines and translations on the ESMA website here.
