This note sets out the scope of the European Securities and Markets Authority’s (ESMA) final guidelines on funds’ names using ESG or sustainability-related terms (the Guidelines). 

We set out below the scope of the Guidelines, the timing considerations and any action fund managers need to take ahead of the deadline. Although the Guidelines were first published in May 2024, ESMA published the official translations of the guidelines in August 2024, which determined the deadlines for compliance (as detailed below). 

Scope

• The Guidelines apply to Alternative Investment Fund Managers (including internally managed AIFs), UCITS management companies, (including any UCITS which has not designated a UCITS management company), EuVECA, EuSEF and ELTIF and MMFs managers.
• The obligations under the Guidelines apply to all fund documentation and marketing communications addressed to investors or potential investors for UCITS and AIFs, including when they are set up as EuVECAs, EuSEFs, ELTIFs and MMF.
• ESMA expects fund managers to make “every effort” to comply with the Guidelines and expects competent authorities (such as the CBI and CSSF) to ensure, through their supervision, that fund managers are complying with the Guidelines.
• It is expected that around 1,702 of EU-domiciled AIFs will be affected by the new rules, including many private funds.

Timing considerations

• National competent authorities have until 21 October 2024 to notify ESMA whether they:
  • comply;
  • do not comply but intend to comply; or
  • do not comply and do not intend to comply with the Guidelines. 
• The Guidelines will apply from 21 November 2024. For any funds in existence prior to this date, a transitional period of six months applies, and these funds must comply with the Guidelines by 21 May 2025.

The Guidelines

• If using certain terms within a fund name, under the Guidelines, this could trigger both asset allocation thresholds and asset exclusions.
• There are three categories that a fund name could fall in scope of:
  • transition, social and governance-related terms;
  • environmental or impact-related terms; or 
  • sustainability-related terms.
•  For each category, there is a minimum threshold linked to the proportion of investments used to meet the environmental/social characteristics or the sustainable investment objective. Each category must also comply with a list of required exclusions in relation to the whole portfolio of the fund. 

Application to closed ended funds

• ESMA have clearly stated that the Guidelines apply without distinction to both open and closed ended funds. ESMA is of the view that it would be meaningful to ensure that the name of the fund matches with the underlying investments even for investors in a closed ended fund. 
• Furthermore, ESMA’s view is that excluding unlisted closed ended funds from the scope of the Guidelines would create an inconsistency with the guidelines on marketing communications under the regulation on cross-border distribution of funds where such an exclusion does not exist.

Next steps for fund managers

• For any new funds that are due to be launched on or after 21 November 2024, the fund manager should consider the name of the fund in accordance with the Guidelines, ensuring that at least 80% of the fund is invested in accordance with the environmental/social characteristics or sustainable investment objective of the fund and the required exclusions are incorporated into the LPA/relevant documentation.
• For any existing funds, fund managers should review the names of each fund and then ensure that the Guidelines are complied with by 21 May 2025. This may include updating the SFDR disclosures to ensure the minimum asset allocation is 80% or higher and updating the exclusion criteria of the fund. If an 80% asset allocation or the relevant exclusion criteria is unachievable for the fund given its investment strategy, the fund manager should strongly consider changing the name of the fund. This could require investor consents and/or updated disclosures and funds should consider the Guidelines now to allow them to take any necessary action.
• If any funds have sustainability-related terms in the name of the fund, the fund manager should consider whether the fund can commit to invest meaningfully in sustainable investments. There is little guidance on what “meaningfully” means but our view is that it should be an integral part of the investment strategy in order to be considered meaningful. 
• Any temporary deviation from the threshold and the exclusions will be treated as a passive breach and ESMA expects that fund managers should correct this in the best interest of investors as soon as possible, provided that the deviation is not due to a deliberate choice by the fund manager. 
• Managers may also want to consider how ongoing compliance with the relevant exclusions will work in practice and how revenue threshold data will be collected and administered to ensure continued compliance.