The fund name regularly conveys the first impression of the financial product and evokes an immediate idea in the potential investor as to how and in which assets the fund will probably invest. As a marketing tool, it shapes the decision-making of potential investors and plays an essential role in fund distribution. In recent years, it has become fashionable to also use “green” or ESG or sustainability-related terms in the name of the fund. From the point of view of the supervisory authority, this entails an increased risk of greenwashing, i.e. the unjustified claim of an ecological benefit of the investment.
Greenwashing can already be countered in many ways. The Disclosure Regulation (SFDR) and the Taxonomy Regulation have done fundamental work. Under the SFDR, naming already plays a role, for example in the categorisation of the fund under Article 8 or 9 SFDR. There are civil and also criminal law consequences of greenwashing.
The European Securities and Markets Authority (ESMA) now wants to regulate fund names again explicitly and separately. Already on 31 May 2022, it had recommended in a supervisory briefing that ESG terms should only be used in fund names if they are also reflected in the respective fund’s investment objectives. This is in line with the requirements of the UCITS and AIFM Directives that fund managers should be honest, fair and diligent and that fund documentation should be clear and not misleading.
ESMA has now issued draft guidelines on the use of ESG-related terms in fund names for consultation in November 2022. With its proposal, it wants to create more transparency in the use of sustainability features and thereby curb greenwashing. The aim is to ensure that the name of a fund allows unambiguous conclusions to be drawn about its investment policy. In view of a significantly increasing demand for funds with sustainability features, misleading fund names are to be prevented and mandatory requirements for the investment policy of the funds concerned are to be created.
The proposed guidelines are addressed to UCITS managers, AIFMs, EuVECA, EuSEF and ELTIF managers as well as their competent supervisory authorities.
Clear requirements from ESMA
They generally recommend for funds with ESG or sustainability in their name that no investments are made in companies involved in activities related to controversial weapons or involved in the cultivation or production of tobacco. In addition, the funds in question may only derive a certain percentage of their income from transactions with oil, hard coal and lignite, gaseous fuels and emission-intensive power generation.
Then, surprisingly, ESMA imposes its own hard investment limits. For example, an ESG or “impact” reference may be made in the fund name if at least 80% of the investments are used to meet the environmental or social characteristics or sustainable investment objectives according to the binding elements of the investment strategy. According to ESMA’s survey, such a rule currently affects over 4,000 funds established in Europe, all of which have ESG references in their names.
If the term “sustainable” or a term derived from it is to be used in the fund name, an even more far-reaching regulation applies. In addition to reaching the 80% threshold described above, at least half of these investments must consist of sustainable investments.
A fund that is to be designated with “impact”, “impact investing” or a term derived therefrom must meet both of the aforementioned qualitative thresholds and must also operate with the intention of achieving positive and measurable social or environmental impacts in addition to a financial return. However, ESMA does not provide a more detailed definition of this intention.
The consultation has been closed on 20 February 2023. On the part of the stakeholder associations, the attempt to harmonise administrative practice across the EU was welcomed. However, the timing of the guidelines in particular was criticised, as the Commission was preparing proposals on ESG labels in parallel.
The final guidelines will come into force three months after their publication, with a six-month transitional period for existing funds, during which they will either have to restructure their investments or change their name. It is therefore advisable to analyse one’s strategic orientation early on and readjust if necessary.