ESMA guidelines on Funds' Names
Published on 15 June 2024
The Fund Naming Directive is an EU regulation that aims to harmonise the rules for naming investment funds. The main objective is to ensure that fund names are clear, precise and do not confuse investors in order to reduce the risks of greenwashing. The guidelines published in May 2024 by ESMA, which is the equivalent of the AMF at European level, establish strict rules for consistency between the name of funds and their ESG policy.
There are 5 main families of terminology which are concerned by this regulation:
- Everything that is environment, climate, green, but also ESG and SRI
- The term sustainable
- The term impact
- Everything that relates to social and governance
- And finally the term transition
In order to understand what ESMA is asking for in order to have the right to use these terms in fund names, we will quickly go back over the exclusions resulting from the European Commission's climate benchmark regulations, the famous PAB indices for Paris Aligned Benchmark and CTB for Climate Transition Benchmark, because these are the exclusions that are included in the Fund Naming Directive.
The CTB indices exclude controversial weapons, tobacco and companies that violate the principles of the United Nations Global Compact (human rights, corruption, child labour). The PAB indices also exclude companies whose revenues come from coal, oil, gas and electricity production that emits a lot of greenhouse gases, with strict thresholds.
Now let's get back to our 5 categories:
- For all, the coverage of the ESG analysis must be at least 80%
- For the Environment, Sustainable and Impact categories, funds must exclude companies excluded by the PAB indices.
- For the Social / Governance and Transition categories, funds must exclude companies excluded by the CTB indices, and can therefore invest in oil companies for example.
- Then, there are additional criteria for certain categories:
- There is a link between the term sustainable in the name of the fund and the notion of sustainable investment in the SFDR sense: to be called sustainable, the fund must have a significant weight in companies qualified as sustainable investments by the management company (whose methodology is in the hands of the management company, and the quantification of what is put behind it is also significant)
- To be called impact, you must have defined ex ante indicators for measuring the impact
- Finally, to be called transition, you must have a progression objective on an environmental or social indicator.
Finally, when we combine terms, for example climate transition, or social impact, there are 3 rules to remember:
Rule #1: By combining the terms, we accumulate the constraints linked to each of the terms
Rule #2 – this is an exception: when we use the term transition combined with another term, it is the CTB exclusions that take precedence
Rule #3 – this is also an exception: when we use the term sustainable, it is the most binding term so it is the PAB exclusions that take precedence: so clearly Climate transition does not exclude fossil fuels, but sustainable transition excludes fossil fuels.
In terms of timing – we are waiting for the publication of the ESMA guidelines in all EU languages, we will also have the list of terms in French at that time, for entry into force 3 months later for new funds and 9 months later for existing funds, for countries whose national regulators have chosen to comply, we are waiting for the position of the AMF – there is a consultation in progress, but it is likely that the AMF will comply.