New ESMA Questions & Answers on its Guidelines on Funds' Names Using ESG or Sustainability-Related Terms and Updated CSSF FAQ on SFDR

Investment Funds Update

I. Additional Guidance published by ESMA on its Guidelines on Funds’ Names

On 13 December 2024, the European Securities and Markets Authority (ESMA), the EU's financial markets regulator and supervisor, published a new set of Questions and Answers (Q&As) to provide further clarity on the application of its Guidelines on funds' names using ESG or sustainability -related terms dated 21 August 2024 (ESMA23-1292494965-657, the "Guidelines")

The three new Q&As focus on green bonds, the concept of "meaningfully investing in sustainable investments" and the definition of controversial weapons.

The new Q&As can be access via ESMA's press release.

1. Green Bonds

Application of Exclusions for Green Bonds

The Q&A addresses the application of investment exclusions for green bonds, particularly those issued under the Regulation (EU) 2023/2631 of 22 November 2023 on European Green Bonds and optional disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds, as amended (the "Green Bonds Regulation"). The guidance differentiates between European Green Bonds and other use-of-proceeds instruments:

• European Green Bonds: ESMA clarifies that bonds issued under the Green Bonds Regulation do not need to be assessed under the PAB and CTB exclusions referred to in paragraphs 16-18 of the Guidelines.
• Other Use-of Proceeds Instruments: For other use of proceeds instruments, such as green bonds not issued under the European Green Bonds Regulation, fund managers should apply the exclusions on a look-through basis. This means assessing the economic activities financed by such instruments to ensure they do not involve activities referred to in Article 12(1)(a-b) and (d-g) of Commission Delegated Regulation (EU) 2020/1818 of 17 July 2020 as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, as amended (the "Commission Delegated Regulation"). Investments in companies excluded under Article 12(1)(c) of the Commission Delegated Regulation (i.e., companies violating the UN Global Compact principles or the OECD Guidelines for Multinational Enterprises) are always excluded.

2. Meaningfully Investing in Sustainable Investments

Minimum Investment Levels for Sustainable Funds

The Q&A provides further clarity on what constitutes "meaningfully investing in sustainable investments" for funds using sustainability-related terms in their names. 

ESMA highlights that, while national competent authorities (NCAs) are advised to conduct a case-by-case analysis of how sustainability-related terms are used in fund names, ESMA considers that funds with a sustainability-related term in their names should invest at least 50% of the fund's investments in "sustainable investments" within the meaning of Article 2 (17) of the Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial sector, as amended (the "SFDR"). 

ESMA further indicates that NCAs may determine that a proportion of 50% is not sufficient (and that thus the threshold could be higher), depending on the specific circumstances of the case.

3. Definition of Controversial Weapons

Interpretation of Exclusions for Controversial Weapons

The Paris-Aligned Benchmark (PAB) and Climate Transition Benchmark (CTB) exclusions also include the prohibition to invest in companies involved in activities related to controversial weapons. ESMA now also addresses the interpretation of such exclusions under Article 12 (1)(a) of Commission Delegated Regulation (EU) 2020/1818. 

The Q&A specifies that for the purpose of applying such exclusion, NCAs may refer to the list of controversial weapons provided in indicator 14 of Table 1 of Annex I of the Commission Delegated Regulation. This list includes anti-personnel mines, cluster munitions, chemical weapons, and biological weapons.

II. Updated CSSF FAQ on SFDR

In the same context, the Luxembourg financial supervisor Commission de Surveillance du Secteur Financier (CSSF) updated its FAQ on SFDR on 18 December 2024.

In addition to a clarification to the answer provided to question 6 (concerning the use of exclusion strategies by investment funds disclosing under Article 8 and Article 9 SFDR), the CSSF provides further guidance concerning the use of ESG or sustainability-related terms in fund names. The Luxembourg regulator clarifies that Luxembourg investment fund managers, irrespective of whether they are disclosing under Article 6, 8 or 9 SFDR, have to carry out a self-assessment in respect of the applicability of the Guidelines on the products they manage.

The CSSF stresses the responsibility of the investment fund manager to ensure compliance with the Guidelines and the applicable thresholds and exclusions as well as the responsibility of the depositary bank of the respective investment fund for the independent monitoring of such compliance.

III. Conclusion

With the new Q&As, ESMA provides further guidance on some of the hot topics of the Guidelines which have been discussed since their publication. It remains to be seen whether the additional clarifications provided in respect of the treatment of green bonds, the "meaningful" investment in sustainable investments and the meaning of "controversial weapons" will put an end to these discussions and uncertainties.

Authors: Antonios Nezeritis, Partner; Marc Hirtz, Counsel