Last week ESMA published an update on the proposed guidelines on funds’ names using ESG or sustainability-related terms. The goal of this upcoming regulation is to further avoid greenwashing of fund investments. As many funds are using ESG-related fund names, the regulators aim to provide clear rules for the usage of any of those terms.
In the earlier draft, ESMA proposed a threshold of 50% in sustainable investments for the use of sustainability-related words in funds’ names. In the new proposal, the new threshold has been increased to 80%. Additionally, funds shall also apply the Paris-aligned Benchmark exclusions which are defined as follows:
Administrators of EU Paris-aligned Benchmarks shall exclude all of the following companies from those benchmarks:
(a) companies involved in any activities related to controversial weapons;
(b) companies involved in the cultivation and production of tobacco;
(c) companies that benchmark administrators find in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises;
(d) companies that derive 1 % or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite;
(e) companies that derive 10 % or more of their revenues from the exploration, extraction, distribution or refining of oil fuels;
(f) companies that derive 50 % or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels;
(g) companies that derive 50 % or more of their revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh.
For the purposes of point (a), controversial weapons shall mean controversial weapons as referred to in international treaties and conventions, United Nations principles and, where applicable, national legislation.
Furthermore, funds shall invest meaningfully in sustainable investments defined in Article 2(17) SFDR:
“Sustainable investment’ means an investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its impact on biodiversity and the circular economy, or an investment in an economic activity that contributes to a social objective, in particular an investment that contributes to tackling inequality or that fosters social cohesion, social integration and labour relations, or an investment in human capital or economically or socially disadvantaged communities, provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance.”
ESMA is also aware, that those hurdles might not be appropriate for funds focusing on transition strategies and will therefore introduce a new transition-related terms category. Those funds shall follow the new 80% rule and apply the so-called Climate Transition Benchmark (CTB), which are the first 3 paragraphs from the Paris-aligned Benchmark exclusions quoted above in this article.
Social and governance terms will be treated separately from the environmental terms as the investment universe could be too restricted by a hard exclusion of fossil fuels.
The final rules are expected to be published end of Q2 2024. The implementation timeline is 3 months after the official publication. The new rules will apply to both, UCITS and AIFs.
For more details, please see https://www.esma.europa.eu/press-news/esma-news/esma-proposes-changes-and-updates-timeline-its-guidelines-funds-names.
If you have any questions or need any help, if your funds fulfil the new requirements, feel free to contact the iQuant team at any time.
Sources: ESMA, EUR-Lex
