ESMA guidelines prompt Irish funds rebranding question

While it is incumbent on the European Securities and Markets Authority (ESMA) to clarify what environmental, social, and governance (ESG)-related and sustainability-related terms are subject to its guidelines, Irish fund managers should take a view as to whether their fund products will be considered in-scope of those guidelines and, if so, whether they currently comply with the requirements of the guidelines or should affect a rebranding.

The ESMA guidelines

On 21 August, ESMA published finalised guidelines regulating the use of environmental, social, and governance (ESG)-related and sustainability-related terms in fund names.

The guidelines reflect ESMA’s desire to address the risk of greenwashing and are aimed at ensuring that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG- or sustainability-related terms in fund names.

Application date

The guidelines apply to all new funds established from 21 November 2024.

Existing funds authorised prior to 21 November 2024 will be afforded a six-month transition period and therefore will need to comply with the guidelines by 21 May 2025. National competent authorities (NCAs), such as the Central Bank of Ireland (Central Bank), were obliged to notify ESMA by 21 October 2024 whether they comply with the new regime; do not comply, but intend to comply, or do not comply and do not intend to comply with the guidelines, with it being open to NCAs to introduce or maintain their own fund naming regime.

Central Bank and the streamlined filing process for Irish funds

To facilitate an orderly implementation of the guidelines, the Central Bank is establishing a streamlined filing process for existing Irish Undertakings for Collective Investment in Transferable Securities (UCITS) and alternative investment funds (AIFs) seeking a change of name and for updates to fund prospectuses, supplements and Sustainable Finance Disclosure Regulation (SFDR) annexes to comply with the requirements of the guidelines.

Fund managers that apply to change the name of a UCITS or AIF will be required to certify compliance with the guidelines via an attestation that must be submitted to the Central Bank. The streamlined filing process will open from 21 November. Initially the Central Bank said the changes that could be made via this process would be limited solely to name changes that are required for UCITS and AIFs to comply with the guidelines, but on 1 November it confirmed that it will also allow funds to incorporate minor changes to disclosure in the offering documentation and pre-contractual documentation made solely for the purpose of bringing the fund into compliance with the guidelines’ requirements. This is welcome news and reduces the administrative burden on managers where their Irish fund range is impacted by the issues with the guidelines we identify below.

The guidelines in more detail

The guidelines have been put in place to protect investors, as the name of a fund is considered to be an important marketing tool and is often the first piece of fund information investors see. Although an investor should look beyond the name of a fund to the information contained within the offering documents, ESMA’s view is that a fund’s name can have a significant impact on an investor’s investment decision.

The guidelines will apply to: UCITS management companies; AIF managers; the managers of European venture capital funds (EuVECAs), European social enterprise funds (EuSEFs), European long-term investment funds (ELTIFs) and money market funds (MMFs), as well as to NCAs in their supervisory practices.

A series of recommendations on the use of terms in fund’s names are set out in the guidelines.

Funds using “transition”, “social” and/or “governance” related terms

Funds using the above terms need to meet a two-fold test: the fund must invest at least 80% of that portion of its portfolio that is used to meet an environmental or social characteristic or sustainable investment objective in accordance with the binding elements of its investment strategy , and; the fund must exclude investments that cannot be included in EU climate transition benchmarks, such as companies involved in the production of tobacco, controversial weapons, or companies that benchmark administrators found to be in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) guidelines for multinational enterprises.

Funds using “environmental” or “impact” related terms

Funds using the above terms must also meet the two-fold test referred to above, however these funds must also exclude investments that cannot be included in Paris-aligned benchmarks. This means that, in addition to the above noted exclusions, funds using these terms may not invest in the following types of companies:

• companies that derive 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite;
• companies that derive 10% or more of their revenues from the exploration, extraction, distribution or refining of oil fuels;
• companies that derive 50% or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels; and
• companies that derive 50 % or more of their revenues from electricity generation with a greenhouse gas intensity of more than 100g CO2 e/kWh

Funds using “sustainability” related terms

Under the guidelines, funds using “sustainability”-related terms are required to meet the same test as funds using “environmental” or “impact” related terms, as referred to above. However, in addition, funds using “sustainability” related terms must commit to investing meaningfully in ‘sustainable investments’ as defined in the SFDR.

The lack of clarity and how we can assist

The guidelines apply to funds using ESG- or sustainability-related fund names and ESMA has confirmed that the terms it has identified as being subject to the guidelines are non-exhaustive. This is leading some managers to adopt a conservative approach regarding the inclusion of ESG-related terms that are not specified in the guidelines in the names of their funds.

The financial regulatory authority in Luxembourg, the Commission de Surveillance du Secteur Financier (CSSF), recently raised concerns that the drafting of the guidelines may result in an inconsistent interpretation of the guidelines in EU member states. The CSSF also raised concerns about the non-exhaustive nature of the naming rules and identified the lack of clarity around the requirement for “meaningful” investment and what this requirement means for funds that use sustainability-related terms in their names.

The CSSF has called for ESMA to provide further guidance on these points to assist with the interpretation of its guidelines. However, the 21 November deadline is fast approaching with no further clarity on the horizon. It remains to be seen if there is any divergence in how the guidelines are interpreted by the relevant NCAs across different EU member states.

Whilst assisting fund managers in their assessment of whether their Irish fund range is subject to the guidelines, we are currently seeing a number of managers with Irish funds using ESG- or sustainability-related fund names opting to undergo a name change rather than meet the criteria set out in the guidelines and avoid materially overhauling the investment policy of the relevant funds to comply with the guidelines. Managers have also identified the costs involved in compliance and the potential issues in requesting investor consent for any material changes.

Editor’s Note, 01/11/2024: This article has been updated to reflect the changes to Central Bank’s policy on the changes that can be applied via the streamlined process that it confirmed on 1 November 2024.