SFDR update: ESMA Q&As on ESG fund names guidelines and update of CSSF SFDR FAQ

ESMA publishes Q&As on the application of the Guidelines on ESG fund names 

On 13 December 2024, the European Securities and Markets Authority (ESMA) published three UCITS and AIF Q&As specifying certain aspects of the practical application of its Guidelines on funds' names using ESG or sustainability-related terms (the "ESG Fund Names Guidelines") with the aim of ensuring a smooth application of the Guidelines through a common understanding of key concepts.

• With respect to green bonds, ESMA (ESMA_QA_2368 (UCITS)/ESMA_QA_2370 (AIF)) explains that investment restrictions related to the exclusion of companies do not apply to investments in European Green Bonds, i.e. those that meet the requirements of the European Green Bonds Regulation (Regulation (EU) 2023/2631) which will start applying from 21 December 2024. 

  For other bonds, such as green bonds, ESMA has helpfully clarified that the PAB exclusions (Article 12 (1) (a-b) and (d-g) of Commission Delegated Regulation (EU) 2020/1818 (the "Delegated Regulation") can be applied on a look-through basis to the economic activities financed by the relevant bond. Previously, ESMA appeared to require that the PAB exclusions be applied to the bond issuer and not just the bond, which may have resulted in many green bonds not meeting the requirements of the ESG Fund Names Guidelines. There is however one exception, bond issuers in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises) are always excluded.

• For funds using "sustainability-related" terms in their name and which have to, inter alia, commit to "invest meaningfully in sustainable investments referred to in Article 2 (17) of the SFDR", ESMA (ESMA_QA_2373 (UCITS)/ESMA_QA_2374 (AIFs)) clarifies in its Q&A that, while national competent authorities (NCAs) should carry out a case-by-case analysis of how any sustainability-related term is used in the name of a fund, NCAs may find that investment funds with "sustainable" terms in their names investing less than 50% in sustainable investments are not "meaningfully investing in sustainable investments" and that the amount could be higher, subject to the circumstances of the case. 

  ESMA had initially made reference to a 50% sustainable investment threshold in its consultation on the ESG Fund Names Guidelines and then, following industry pushback, dropped it in the final version making reference instead to the concept of "meaningful" sustainable investments which, while not entirely clearly, did provide flexibility and reflected the fact that what is a "meaningful" sustainable investment may differ according to the investment strategy. While this Q&A does give the impression that ESMA is re-introducing the 50% threshold through the backdoor, the wording of the Q&A should give NCAs the flexibility to accept lower percentages on a case-by-case basis and subject to a reasoned explanation.

• As regards the exclusion of companies involved in any activities related to controversial weapons, ESMA specifies in its Q&A (ESMA_QA_2371 (UCITS)/ESMA_QA_2372 (AIFs)) that NCAs may, in the absence of any other clarification in the Delegated Regulation, refer to the list of controversial weapons provided in principal adverse impact indicator 14 of Table 1 of Annex I of the SFDR Level 2 Regulation (Commission Delegated Regulation (EU) 2022/1288), namely "anti-personnel mines, cluster munitions, chemical weapons and biological weapons".

The CSSF updates its SFDR FAQ

On 18 December 2024, the CSSF updated its SFDR FAQ in order to remove a number of Q&As (i.e. Questions 2, 9 and 10) and to update Q&A 6 in order to specify that investment funds disclosing under Article 9 may include other investments "used for hedging or relating to cash held as ancillary liquidity, which need to fit the overall sustainable investment objective of the fund" (while the previous version referred to "other investments for certain specific purposes such as hedging or liquidity"). Q&A 7 was updated in order to make reference to the ESG Fund Names Guidelines (incorporated into the Luxembourg regulatory framework by CSSF Circular 24/863) and to make it clear that it expects UCITS management companies and AIFMs ("IFMs") to carry out a self-assessment on the application of the ESG Fund Names Guidelines to the funds under management (irrespective of whether these are disclosing under Articles 6, 8 or 9 SFDR) and to ensure compliance. The CSSF goes on to state that IFMs must ensure ongoing compliance with all applicable thresholds and exclusions set out in the ESG Fund Names Guidelines and that the depositary is in charge of the independent monitoring of such compliance in line with its depositary oversight duties.