ESMA finalises fund naming guidelines with 80% ESG investment threshold

ESMA published final guidelines requiring funds using ESG or sustainability terms to hold at least 80% of investments aligned with those characteristics, plus exclusion criteria. For Indian asset managers marketing ESG funds in or alongside European markets, the rules raise the bar for substantiating sustainability labels and reducing greenwashing risk.

ESMA released finalised guidelines on the use of ESG and sustainability-related terms in investment fund names, responding to a fourfold increase over the past decade in European funds using such terms. The guidelines, following a November 2022 consultation, set an 80% minimum proportion of investments for funds using ESG-related words. ESMA removed the originally proposed 50% sustainability threshold but added a requirement for meaningful investment in sustainable investments. A transition category using terms like "improving" and "progress" also requires the 80% threshold. The guidelines take effect three months after publication.

Asset managers using ESG, sustainability, or transition-related terms in fund names are directly affected, as they must now meet the 80% investment threshold and apply exclusion criteria. Funds using the term "sustainable" must maintain 80% aligned investments and demonstrate meaningful sustainable investment. Funds using transition terms such as "improving," "progress," "evolution," and "transformation" apply exclusions based on EU Climate Transition Benchmarks rather than Paris Aligned Benchmarks, allowing some fossil fuel revenue exposure. Providers relying on generic ESG branding to attract investors face the greatest adjustment.

Affected fund providers should assess whether existing fund portfolios meet the 80% threshold and applicable exclusion criteria before the guidelines take effect three months after publication in all EU languages. Managers using "sustainable" terms must verify meaningful sustainable investment levels, while those using transition terms should confirm alignment with Climate Transition Benchmark exclusions. Funds falling short may need to rename or rebalance holdings. Providers should review the published guidelines on the ESMA website and prepare documentation evidencing alignment between fund names and underlying investments.

Key figure — Minimum investment threshold for ESG fund names: 80%