ESMA ESG / Sustainability Fund Naming Conventions

On 14^th May, ESMA published its final report on funds’ names using ESG or sustainability-related terms. This followed feedback and changes made to the original consultation. At 57 pages it is a hefty read, but there are some important changes to note within the text.

Some of the key points where changes have been made because of the responses to the consultation include: -

1. Removal of the 50% threshold for sustainable investments – (Note: this does not alter the 80% threshold for ESG related terms). Instead, ESMA is introducing a commitment to invest meaningfully in sustainable investments for the use of any sustainability-related words in funds’ names.
2. Adjustments of minimum safeguards - The Climate Transition Benchmark (CTB) will now be provided for terms that are transition-, social- and governance-related. Essentially, CTB covers: -
   1. controversial weapons,
   2. cultivation and production of tobacco, and
   3. violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises

3. Category for transition-related terms - Designed not to penalise investment in companies deriving part of their revenues from fossil fuels, thus promoting strategies aimed to foster a path to transition towards a greener economy.
4. Separation of “E” from “S” and “G” terms and combination of terms - Separating the terms related to social (S) and governance (G) from environmental (E) terms. Funds with S or G terms will apply the CTB exclusions, whereas E can apply the PAB (Paris-aligned Benchmarks) exclusions.
5. “Impact” and “Transition” terms: measurability – Clarification of what the underlying assets held by funds with these terms must be aiming to achieve.
6. Transitional period – Clarifying the length of the transitional period.

Click here to read the paper in full - ESMA34-472-440 Final Report on the Guidelines on funds names (europa.eu)