The subject around funds’ names and the proper use of sustainability-related terminology was one of the main topics covered in the European Securities and Markets Authority (ESMA)’s final guidance on naming ESG funds from May 14, 2024 as well as their summarized joint final opinion from June 18, 2024, which you can find out more about in our previous blog post.
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The subject around funds’ names and the proper use of sustainability-related terminology was one of the main topics covered in the European Securities and Markets Authority (ESMA)’s final guidance on naming ESG funds from May 14, 2024 as well as their summarized joint final opinion from June 18, 2024, which you can find out more about in our previous blog post.
Final stage of ESMAs guidelines
The topic has now reached its final stage with ESMA’s announcement of the translations of its Guidelines on funds’ names in all official EU languages on their official website on August 21, 2024. This publication confirms the entry-into-force of the new requirements three months from the publication date – on November 21, 2024, for all new funds. Already existing funds will have an additional transition period of six months from that date – until May 21, 2025.
Definitions of ESG- and Sustainability-related words
The main goal of the document is to set the long-awaited definitions of distinct categories for the names of financial products in relation to use of ESG- and sustainability-related words. As per ESMA’s guidance these categories are broken down into the following:
- Transition-related words: including “transition” and any derived terms, as well as terms containing and deriving from improve, progress, evolution, transformation, net zero.
- Environment-related words: indicating the promotion of environmental characteristics, such as green, environmental, climate, or which include an ESG and socially responsible investing (SRI) abbreviations.
- Social-related words: indicating the promotion of social characteristics, such as social, equality.
- Governance-related words: indicating governance focus, e.g., governance, controversies.
- Impact-related words: including “impact” and any derived terms.
- Sustainability-related words: including “sustainable” and/ or “sustainability.”
Compliance requirements
With regard to the above categories, any fund wishing to use the respective terminology in its name, would need to have at least 80% of its investments meet the environmental or social characteristic or sustainable investment objectives in accordance with the binding elements of the investment strategy, which is part of the Regulatory Technical Standards (RTS) from the Sustainable Finance Disclosure Regulation (SFDR) – more precisely Annexes II and III. Additionally, the funds must apply exclusions in accordance to the minimum standards for the respective EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks (CDR (EU) 2020/1818). A supplementary third criteria is applicable for “sustainability-related” terms which necessitate the fund to “invest meaningfully in sustainable investments referred to in Article 2(17) of the SFDR,” as formulated by ESMA in their official statement.
The supervision of these new requirements falls under the jurisdiction of all national authorities in the EU, which are suggested to follow an initial passive breach approach to any funds which fail to comply. As per ESMA’s Guidance any breaches should be noted in a timely manner and corrected, so that the best interest of the investor is safeguarded. Immediate strict sanctions are to be applied only in cases where the deviation is proven to be a deliberate action by the Fund Manager. While the guidance is not directly binding and needs to be supervised by national authorities, cleversoft expects that some fund will adjust their names for better compliance with the requirements of ESMA.
cleversoft services
cleversoft’s compliance commitment is one of the most valued services which we are proud to offer to all our clients as part of our standard SFDR service. Our Regulatory Compliance Team is constantly monitoring the development of the sustainable investment landscape in Europe, so that all our clients are kept informed about any regulatory updates in a timely manner and that our services are accurately aligned to any and all official regulatory requirements.
If you are interested in any of the SFDR modules – pre-contractual, periodic, web disclosures or PASI Statement – we invite you to get in touch with us, and we will gladly present the various options which you can benefit from by becoming our client.