On 14 May 2024, the European Securities and Markets Authority (ESMA) published the guidelines on fund names using environmental, social and governance (ESG) or sustainability-related terms.
The main purpose of these guidelines is to enhance investor protection with regard to funds named in ways suggesting an investment focus in companies that meet certain sustainability standards.
Indeed, the sustainability-related name of a fund may hold an attractive impact on investors and their investment decisions. Yet, when the sustainability-evoking name is not reflective of the actual engagement of the fund, this could, in turn, lead to greenwashing practices.
Against this backdrop and after the public consultation launched on 18 November 2022, ESMA clarifies what investors may expect in terms of policies, practices and characteristics of funds consistent with sustainability standards, as also the circumstances where a fund name with ESG or sustainability-related terms is indicative of unfair, unclear or misleading practices.
As the guidelines apply immediately for new funds to be created and six months following the publication of the guidelines of existing funds, fund managers may have to reconsider the name used for their funds comprising an ESG or sustainability related name.
For further information and to discuss what this development might mean for you, please get in touch with your usual Baker McKenzie contact.
These guidelines apply to:
They apply to any of the abovementioned funds that have the following terms in their names:
For each of these terms, certain thresholds have to be met by the fund’s investment strategy. For instance:
These guidelines are applicable three months after their publication into all EU languages.
The guidelines apply immediately for funds to be newly created. For existing funds, the transitional period for will be six months after the above mentioned publication.
1 Article 12 (1) reads as follow: “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.
Laurent Fessmann is a Banking & Finance partner specializing in the formation and structuring of Luxembourg investment funds. He is a former managing partner of the Luxembourg office and the current co-chairman of the Baker McKenzie’s Global Funds Steering Committee. He started his career in 1996 as in-house counsel in a French CAC40-listed company where he worked intensively on LBO transactions, capital markets and corporate law matters. Mr. Fessmann joined a Luxembourg business law firm where he became a partner prior to founding his own law firm in 2009. He is a highly regarded professional and recognized legal professional in Chambers, Legal 500, IFLR notably. He contributes time and knowledge in several market participant industry associations in particular as co-chairman of the ABBL/ALFI depositary forum working groups, the European Public Real Estate Association, the Luxembourg Private Equity Association and the Association of Global Custodians. He is also a regulator at fund conferences such as ALFI, IBCI and regularly invited to speak on internal or bank seminars.
Catherine Martougin is a partner in the Funds & Asset Management team of the Baker McKenzie Luxembourg office. She has more than 20 years’ experience in business law. Prior to joining the Firm, she practiced in elite international law firms in Paris and Luxembourg.
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