ESMA publishes translations of its guidelines on funds’ names

The European Securities and Markets Authority (ESMA) published translations in all official EU languages of its Guidelines on funds’ names using ESG or sustainability-related terms (the Guidelines) on 21 August 2024. This triggers the application of the Guidelines.

The key dates by which funds will need to adapt and comply are:

  • the Guidelines will apply three months from 21 August 2024 i.e., on 21 November 2024
  • funds created on or after the 21 November 2024 application date should apply the Guidelines from the establishment of those funds
  • the transitional period for funds existing before 21 November 2024 will be six months after the initial application date i.e. 21 May 2025.

The objective of the Guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names.

The Guidelines apply to UCITS management companies, including any UCITS which has not designated a UCITS management company, Alternative Investment Funds Managers (AIFMs) including internally managed AIFs, EuVECAs, EuSEFs, and ELTIF and MMF managers (and competent authorities).

We provide an overview of the new rules contained in the Guidelines here.

Updated SFDR Q&A published

The European Supervisory Authorities (ESAs) published an updated version of the consolidated questions and answers (Q&A) on the Sustainable Finance Disclosure Regulation (SFDR).

The clarifications include:

Scope issues

Q&A 4 clarifies that registered AIFMs are required to comply with the website information requirements of Article 10 SFDR for any Article 8 and Article 9 funds. This can be on the website of the fund or of the group to which the AIFM belongs if it corresponds to the website of the AIFM. If there is no website, the AIFM should establish one. The ESAs emphasise that the information must be easily accessible to investors, should be kept up to date, and any revisions or changes to such information should be clearly explained.

Q&A 5 clarifies that if a financial market participant (FMP) discloses that “it deems sustainability risks not to be relevant” for a product, it cannot disapply other EU law obligations on taking into account sustainability risks e.g., the AIFM or UCITS management company must also take account sustainability risks when complying with the ESG related changes to the UCITS Directive and AIFMD.

PAI disclosures

Q&A 26 confirms that the calculation of principal adverse impact (PAI) indicator 4 in Table 1, Annex I (“Exposure to companies active in the fossil fuel sector”) is on a pass/fail basis and a company is considered to be active in the fossil fuel sector as soon as it derives any revenues from any of the activities in the definition.

Q&A 27 confirms that the calculation of PAI indicator 6 in Table 1, Annex I (“Energy consumption intensity per high impact climate sector”) should be performed so that each high impact sector is aggregated and disclosed separately.

Q&A 28 clarifies that FMPs should use the exchange rate at the end of the fiscal year end for currency conversions into € for all reference points (quarterly calculation and enterprise valuation).

Q&A 29 addresses the question of how FMPs should include financial emissions from investments through products (e.g., a UCITS) under FMPs scope 1, 2 or 3 GHG emissions (PAI indicator 1 of Annex 1).

Financial product disclosures

Q&A 20 explains the methodology for the calculation of the proportion of taxonomy-aligned investments in product pre-contractual and periodic templates and provide illustrative examples.

Q&A 21 includes a table showing hypothetical examples of how calculations of sustainable investments can be made either at the economic activity level or the investment level.

Q&A 22 addresses the question of whether a sustainable investment can be made by investing in another financial product e.g., UCITS fund. The ESAs clarify that if a product invests in other products that make sustainable investments with potentially differing applications of Article 2(17) SFDR, the FMP should ensure that the underlying investments comply with its own application of Article 2(17) SFDR.

Q&A 23 clarifies that delegation has no impact on the FMP’s responsibility to ensure compliance of investments with the definition of sustainable investments in Article 2(17) SFDR (likewise for products using the sustainable investments definition of an index provider). This does not change the Commission’s previous answer that products that passively track a PAB or CTB are deemed to have sustainable investments as their objective and to make sustainable investments.

Q&A 24 clarifies when efficient portfolio management (EPM) techniques and money market funds (MMFs) can be “investments” for certain specific purposes such as hedging or liquidity (for products disclosing under Article 9 SFDR).

Q&A 25 confirms that SFDR disclosure requirements apply equally to products that passively track PABs or CTBs.

Q&A 26 includes the ESAs supervisory expectation for FMP’s Article 10 website disclosures that the obligation to publish the information referred to in Article 8, 9 and 11 SFDR should be fulfilled by publishing the templates in Annexes II-V.

Q&A 27 confirms that where a fund invests in real assets (like cars or real estate) through a SPV or holding company, good governance checks do not have to be made.

Q&A 28 confirms (in line with previous Q&A V.7) that Article 9(3) SFDR is neutral in terms of product design, therefore products that have an objective of reduction in carbon emissions can fall within Article 9(3) SFDR whether they use a passive or active strategy.

ESMA opinion on the functioning of the sustainable finance framework

ESMA published an opinion on the sustainable finance regulatory framework, setting out recommendations for improving the usability and coherence of the EU sustainable finance framework. ESMA’s opinion builds on the findings of the May 2023 ESMA Progress Report on Greenwashing (discussed here) and represents the last component of ESMA's reply to the May 2022 EC Request for input related to greenwashing, and ESMA’s June 2024 Final Report on Greenwashing. It is broadly aligned with the June 2024 Joint ESAs Opinion on the review of the SFDR (discussed here).

In terms of timing of the European Commission’s ongoing comprehensive review of the framework, the European Parliament study on The current Implementation of the SFDR with an assessment on how the legislative framework is working for retail investors notes that a legislative proposal from the European Commission to amend the SFDR is expected shortly after the next Commission begins its term (Q3 2024).

More detail on ESMA’s recommendations for the European Commission:

  • Set the EU Taxonomy as a central point of the framework. The SFDR definition of ‘sustainable investments’ should be phased out and replaced by EU Taxonomy definitions. In the medium term, ESMA supports the ESAs’ proposed approach, particularly to make the key parameters of ‘sustainable investment’ under SFDR more prescriptive. The EU Taxonomy should be enhanced, should become the only reference point for the assessment of sustainability and should be embedded into all relevant sustainable finance legislation.
  • Support transition finance. ESMA recommends incorporating a definition of transition investments into the framework (andreferences the definition included in the EC recommendation on financing the transition): a broader set of transition benchmarks; more ambitious standards for EU Climate Benchmarks and new standards transition bonds and sustainability-linked bonds. Current transition-related obligations and disclosures should be reviewed.
  • Improve transparency requirements. Minimum sustainability disclosures should apply to all financial products (regardless of the stated sustainability ambition of the product) consisting of a small number of simple sustainability KPIs covering basic environmental and social sustainability characteristics. Full sustainability information should be available to all investors. A sub-set of sustainability disclosures (vital information) should be included in short consumer facing documents, such as the PRIIPS KID, updated annually. New rules should ensure alignment between the name of a product, the related marketing material, and the products sustainability profile. MiFID II financial instruments should assessed to clarify which should be subject to standardised minimum sustainability disclosures.
  • Implement a product categorisation system. Aligning with the joint ESA’s opinion, a product categorisation system should be developed that includes categories for sustainable and transition investments, based on a set of clear eligibility criteria and binding transparency obligations. How investors are asked to express their sustainability preferences should be aligned with the product categorisation. ESMA identifies key characteristics for its proposed categories. The feasibility and usefulness of a grading system should be assessed.
  • Improve ESG data quality. Data quality is recognised as critical. ESMA will monitor the practical application of the European Sustainability Reporting Standards. Some investee companies fall outside the scope of the Corporate Sustainability Reporting Directive and so ESG data products should be brought into the regulatory perimeter to ensure that ESG data is reliable and comparable.
  • Improve the conduct of Sustainable Investment Value Chain actors. Due diligence obligations for the financial and non-financial sectors should be clarified. The concept of active engagement with investee companies should be integrated and the introduction of an EU-wide stewardship code for market actors (discussed in ESMA’s May 2023 progress report on greenwashing) should be explored.

Consumer and industry testing is consistently identified as critical.

European Commission adopts ELTIF Regulation RTS

On 19 July 2024, the European Commission adopted a Delegated Regulation supplementing the Regulation on European Long-Term Investment Funds (EU) 2015/760, as amended by Regulation (EU) 2023/606) (ELTIF 2.0) containing regulatory technical standards (RTS) and accompanying annexes, specifying:

  • when derivatives will be used solely for hedging the risks inherent to the investments of the European long-term investment fund (ELTIF)
  • the circumstances in which the life of an ELTIF is to be considered compatible with the life-cycles of each of its individual assets
  • the requirements for an ELTIF’s redemption policy and LMTs
  • the circumstances for the matching of transfer requests of units or shares of the ELTIF
  • criteria for the valuation of ELTIF assets to be divested
  • elements of the ELTIF costs disclosures

For ELTIFs that offer redemption facilities during the life of the ELTIF (an open-ended with limited liquidity ELTIF), the RTS set out the maximum percentage of liquid assets that can be used for redemption requests. The manager of the ELTIF can elect to calibrate that percentage on the basis of either:

  • the redemption frequency and the notice period of the ELTIF in line with Annex I of the RTS, or on
  • the redemption frequency and the minimum percentage of the liquid assets of the ELTIF, as specified in Annex II of the RTS

Read more about the RTS in our related insight, which includes more detail on the key provisions for managers of ‘open-ended’ ELTIFs (e.g., minimum holding period, redemption requirements, LMTs).

Next steps

The Delegated Regulation adopted by the Commission is not final. It is now subject to a three-month scrutiny period by the European Parliament and Council. In the absence of objections, the Delegated Regulation will apply on the day following its publication in the Official Journal of the EU, which is expected to be in Q4 2024.