Sustainable Finance update (asset management) – ESMA publishes final report on ESG fund names guidelines

On 14 May 2024, ESMA published its long-awaited final report on guidelines on funds’ names using ESG or sustainability-related terms. This follows ESMA’s consultation on the guidelines on 18 November 2022 and its public statement providing an update on the guidelines published on 14 December 2023.


According to ESMA, the main purpose of the guidelines is to combat greenwashing by specifying the circumstances where fund names using ESG or sustainability-related terms are unfair, unclear or misleading. Despite a potential significant revamp of the SFDR in the future, ESMA is of the view that any reforms of the SFDR may take years to complete while the greenwashing risks associated with ESG-related fund names need to be addressed in the present.

The guidelines will apply directly to competent authorities and financial market participants, which include UCITS management companies and AIFMs, and concern all relevant fund documentation and marketing communications.

In its public statement and following input received through the consultation, ESMA had announced a number of changes compared to the draft guidelines in the consultation, notably dropping the 50% threshold for sustainable investments (for funds with the term “sustainable” in their name”) replacing it instead with a “meaningful” investment in sustainable investments (no definition of what “meaningful” could mean is provided). Further, ESMA has also made adjustments to the minimum safeguards (i.e. recognition that the Paris-aligned Benchmark exclusions1 (which contain a fossil fuel exclusion) (the “PAB exclusions”) may not be appropriate for funds promoting social or governance characteristics or focusing on transition and which are now required to apply the EU Climate Transition Benchmark exclusions 2 (“CTB exclusions”)).

It is important to note that ESMA has not excluded closed-ended funds from the scope of the guidelines as many in the industry had hoped.

Overall, the guidelines are broadly in line with the changes announced in the public statement.

The guidelines – overview of key aspects

Any ESG-related terms in the fund name (e.g. "climate ", "green", "ESG", "sustainable"…).The key aspect of the guidelines is the introduction of a quantitative threshold. A minimum proportion of at least 80% of a fund’s investments should be used to meet the environmental or social characteristics or sustainable investment objectives, as disclosed in the SFDR pre-contractual annexes. 
Term "sustainable" or any other term derived from the word "sustainable" in the fund name.In addition to the 80% quantitative threshold and PAB exclusions - a "meaningful investment" in sustainable investments, as defined in Article 2(17) SFDR.
“Environmental”, “Impact” and “Sustainability”-related terms.In addition to the 80% quantitative threshold - application of PAB exclusions.
“Transition”, “social” and “governance”-related terms.In addition to the 80% quantitative threshold - application of CTB exclusions.
"Transition"-related terms (e.g. "improving", "progress", "evolution", "transformation"…).In addition to the 80% quantitative threshold and application of the CTB exclusions, investments need to be on a clear and measurable path to social or environmental transition.
“Impact"-related terms.In addition to the 80% quantitative threshold and application of the PAB exclusions - investments made with objective to generate positive, measurable social or environmental impact alongside a financial return.
Where terms are combined, the provisions should apply cumulatively (except for any terms combined with transition-related terms where CTB exclusions will apply).

The guidelines outline the supervisory expectation that the above provisions should apply throughout the life of the fund and that any temporary (and unintentional) deviation from the quantitative threshold and the exclusions should be treated as a passive breach and corrected in the best interest of investors.

Timing and future developments 

Following their publication, the guidelines will be translated into all official EU languages and published ESMA website. The guidelines will take effect three months after the publication of the translations. A six-month transitional period will allow existing funds to bring their investments in line with the guidelines or amend their names accordingly. Managers of any new funds created after the date of application of the guidelines, will need to apply the guidelines immediately.

These guidelines are published under new mandates stemming from the recently reviewed AIFMD and UCITS Directive. ESMA emphasises that these mandates apply broadly to fund names, not just those related to ESG. In the future, ESMA plans to address additional naming considerations beyond sustainability, which will necessitate further distinct evaluations and consultations.


Exclusions for EU Paris-aligned Benchmarks are contained in Article 12(1)(a)-(g) of Commission Delegated Regulation (EU) 2020/1818 which include:
(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.


Exclusions for EU Climate Transition Benchmarks are those contained in Article 12(1)(a)-(c) of Commission Delegated Regulation (EU) 2020/1818.