How should Funds be named?

How should Funds be named? A response to ESMA's final guidelines

by Nathalie Dogniez

 

Debates as to how funds names shall be aligned with sustainability commitments disclosed under SFDR rules has been raging since the early days of SFDR implementation, fund names having a great influence on investor decisions/choices.

In the absence of harmonised guidance as to the use of sustainability-related terms in funds names, various regulatory practices had emerged in Europe leading to ESMA publishing some high-level guidance on funds name in May 2022, followed by a consultation in November 2022.

Recognising that discrepancies between fund names and committed sustainability strategy could confuse investors, ESMA has finally issued its guidelines on funds names using ESG or sustainability-related terms.

These “terms” encompasses a broad range of words such as green, ESG, SRI, transition, improve, social, equality, sustainable, impact, governance, controversies…

Funds wishing to use these terms in their fund names must commit to a proportion of at least 80% of their investment meeting the Environmental Characteristics or Social Characteristics or Sustainable Investment Objectives in accordance with the binding criteria of their investment strategy as defined in the SFDR annex to their prospectus. This minimum percentage must be complied with at all times, but the concept of passive breach will apply.

The guidelines also impose certain exclusions, aligned with the climate benchmark regulation and some additional criteria for certain “categories”.

The guidelines indeed recognise six main categories of ESG or sustainability- related terms:

              ESG is broken down into 3 categories: Environment, Social and Governance. ESG or SRI categories will be subject to the environmental category requirements (as the most demanding in term of exclusions).

              Whilst the article 11 of SFDR makes positive impact measurement an inherent criterion of sustainable investment, the guidelines distinguish between:

o   Funds using impact-related terms (investing with an objective to generate a positive and measurable impact),

o   Funds using sustainability-related terms (committed to invest meaningfully in sustainable investment).

              The guidelines, aligned with the EU Recommendation on Transition Finance, introduces a new category: transition-related terms. Funds using one of these terms in their names shall be demonstrating that their investments follow a clear and measurable path to social or environmental transition.

Basic exclusions of the Climate Transition Benchmark regulation (Controversial weapons, tobacco, UNCG principles or OECD guidelines violations) apply to all categories. Moreover, fossil fuels exclusions as per the Paris Aligned Benchmark (hard coal/lignite, oil fuel, gaseous fuel, electricity generation with higher GHC intensity) apply to environmental, impact and sustainability categories.

When impact, environmental, social or governance terms are combined, their related requirements are cumulative.

The guidelines will apply 3 months after the publication of their translations. Existing funds have 6 more months to comply, so 9 months from the date of publication of the guidelines’ translations.

 

The final guidelines are available on this link.

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