The European Securities and Markets Authority (“ESMA”) has today announced Q&As with further details on certain aspects of the practical application of the Guidelines on funds’ names using ESG or sustainability-related terms (the “Guidelines”).
As a reminder, the Guidelines set out conditions for the use of ESG or sustainability-related terms in the names of investment funds. They are designed to prevent investors from being misled by unsubstantiated or exaggerated claims about the sustainability characteristics of investment funds.
The new Q&As provide important clarifications for fund managers with ESG-focused or sustainable funds. They apply equally to UCITS and AIFs.
Here is a breakdown of the key points:
Funds using ‘sustainability’-related terms in their names (whether as a standalone term or combined with other ESG terms) must – among other things – make ‘meaningful’ investment in sustainable investments (as defined in Article 2(17) of Regulation 2019/2088 on sustainability‐related disclosures in the financial services sector or “SFDR”). The specific interpretation of ‘meaningful’ had not been clarified until now.
A common threshold has now been confirmed: funds must have at least 50% of their portfolio allocated to sustainable investments to claim they are ‘meaningfully’ sustainable.
Our ESG legal team has prepared a succinct table of the requirements to ensure you can easily follow the Guidelines. Get your copy here.
ESMA has also clarified that investment restrictions that exclude certain companies (e.g., based on ESG criteria) do not apply to European Green Bonds, as these bonds must follow strict regulatory frameworks under Regulation (EU) 2023/2631 (the “European Green Bonds Regulation”).
For other types of green bonds, ESMA has clarified that fund managers are permitted to use a look-through approach to evaluate whether the activities funded by these bonds align with the fund’s exclusions (e.g., financing fossil fuels).
By way of context, ESMA has decided to clarify the treatment of green bonds due to the imminent application of the European Green Bonds Regulation on 21 December 2024 and the reference in the sectoral legislation (the UCITS Directive and AIFMD). It also noted that sectoral legislation takes precedence.
In answering the question ‘How should the exclusions related to controversial weapons referred to in Commission Delegated Regulation (EU) 2020/1818 be interpreted for different types of controversial weapons?’, ESMA confirmed that the exclusion of controversial weapons is tied to SFDR Principal Adverse Impact Indicator (PAI) 14.
The term should therefore be understood as meaning ‘anti-personnel mines, cluster munitions, chemical weapons and biological weapons’.
This ensures consistency across funds in defining and excluding companies involved in controversial weapons.
The Zeidler Legal Team are here to assist with any questions or support you may need regarding sustainable finance. Contact us for more information.
