Crack Down on Fund Mislabelling: New ESG Fund Name Guidelines on the Horizon | EU

Claire Guilbert and Cyril Clugnac of Norton Rose Fulbright examine the ESMA’s proposed guidelines on fund names using ESG- or sustainability-related terms, emphasising quantitative thresholds and minimum safeguards to combat greenwashing and ensure investor expectations are met.

Published on 16 February 2024
Claire Guilbert, Norton Rose Fulbright, EF
Claire Guilbert
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Cyril Clugnac, Norton Rose Fulbright, EF
Cyril Clugnac
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Investor demand for investment funds that incorporate environmental, social, and governance (ESG) factors has grown and will continue to grow in the future. In this context, the name of a fund is important as it is usually the fund’s first attribute that investors see and therefore has the potential to have a significant impact on their investment decisions. Financial services regulators are aware of this too and have concerns regarding the risks of greenwashing.

There are currently no binding rules in force at the EU level in this respect and, in this context, the European Securities and Markets Authority (ESMA) now intends to issue guidelines on funds’ names using ESG or sustainability-related terms. The ESMA has already published a supervisory briefing on 31 May 2022 containing, inter alia, principle-based guidance on fund names with ESG and sustainability-related terms. The briefing, issued in application of Article 29(2) of Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 (ie, the regulation establishing the ESMA – the “ESMA Regulation) is non-binding, meaning it does not require European Supervisory Authorities (ESAs) to apply the comply or explain mechanism; its purpose is rather to promote common supervisory approaches and practices.

ESMA Consultation

More recently, the ESMA opened a consultation on this matter via the publication of a consultation paper on guidelines for naming funds using ESG or sustainability-related terms (the “Guidelines), which closed on 23 February 2023. The ESMA was initially expecting to finalise the Guidelines by Q2/Q3 2023, under Article 16 of the ESMA Regulation (ie, subject to a comply or explain mechanism from ESAs, unlike the briefing). However, on 14 December 2023 the ESMA announced a delay in the adoption of the Guidelines to fully consider the outcomes of two important legislative reviews covering Directive 2011/61/EU of the European Parliament, and of the Council of 8 June 2011 and Directive 2009/65/EC of the European Parliament, and of the Council of 13 July 2009 (the “Review”). The ESMA also took this opportunity to amend its proposed Guidelines (the “Revised Guidelines”).

Quantitative thresholds (the proportion of ESG-related investments and/or sustainable investments) are contemplated under the Revised Guidelines as a condition for funds to use ESG and/or sustainability-related terms in their names. This is dependent on the type of terms (different thresholds for ESG-related terms and sustainability-related terms) used by a fund in its name, as well as minimum safeguards (including the exclusion criteria defined in Commission Delegated Regulation (EU) 2020/1818 of 17 July 2020 – the “Benchmark Delegated Regulation).

If a fund has any ESG, or impact-related words in its name, a minimum proportion of 80% of its investments should be used to meet the environmental, social characteristics, or sustainable investment objectives (the “Threshold) in accordance with the binding elements of the investment strategy. These are disclosed in Annexes II and III of Commission Delegated Regulation (EU) 2022/1288, which supplements Regulation (EU) 2019/2088 of the European Parliament, and of the Council of 27 November 2019 (SFDR).

Furthermore, if a fund has the word “sustainable” or any other term derived from the word “sustainable” in its name, it should, in addition to the foregoing:

  • apply the Paris-aligned Benchmark (PAB) exclusions; and
  • invest “meaningfully” in sustainable investments defined in Article 2(17) of the SFDR, reflecting the expectation investors may have based on the fund’s name.

Under the Guidelines, these two requirements were replaced with a condition to allocate within the Threshold at least 50% of a minimum proportion of sustainable investments, as defined by Article 2(17) of the SFDR.

For “transition”-related terms, the ESMA suggests in the Revised Guidelines introducing a new category for which, in addition to the Threshold, Climate Transition Benchmark (CTB) exclusions should be applied (instead of the PAB exclusions). This amendment is designed to not penalise funds with those terms in their names (as the fossil fuel exclusions in the PAB could unnecessarily penalise these funds) that pursue strategies fostering a path to transition towards a greener economy. Following the same logic, CTB exclusions will apply to funds’ names combining environmental terms with "transition"-related terms.

“The Revised Guidelines recommend that ESAs consider the guidance throughout the life of a fund”.

The ESMA also suggests that PAB exclusions could be too restrictive for funds focusing on social or governance aspects, noting that PAB exclusions continue to be “merited for funds with environmental terms in their names, as it is reasonable for investors to expect funds with environmentally related terms in their names to not significantly invest in fossil fuels”.

Furthermore, (i) “transition”-related or “impact”-related terms should only be used by funds meeting the quantitative thresholds set out above and whose investments under the minimum proportions of investments are made with the intention to generate a positive, measurable social or environmental impact, alongside a financial return; and (ii) funds designating an index as a reference benchmark can only use ESG- and sustainability-related words in their name if the above guidance is fulfilled.

The Revised Guidelines recommend that ESAs consider the above-mentioned guidance throughout the life of a fund, and that a temporary deviation from the applicable thresholds/conditions, if the said deviation is not due to a deliberate choice of the asset manager, should be treated as a passive breach and corrected in the best interest of investors. Each ESA will have to define what they consider to be a passive breach in light of the foregoing.


The ESMA intends to adopt the Revised Guidelines following the outcome of the Review, which would apply three months after the date of their publication on the ESMA’s website in all EU official languages. Managers of new funds would be expected to comply with the Revised Guidelines in respect of those funds from the date of application of the Revised Guidelines. Managers of funds existing before the date of application of the Revised Guidelines should comply with respect to those funds six months after the application date.

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