ESMA ditches 50% threshold for ‘sustainable’ funds in update to draft guidance

EU financial watchdog shares proposed amendments to ESG fund name guidelines, including transition category, announces postponement of adoption until Q2 2024.

The EU’s securities watchdog ESMA has dropped plans to include a 50 percent threshold for funds using sustainability-related words in planned guidelines on fund names.  

Under the draft proposals put out in November 2022, those with sustainability-related terms would have been required to allocate at least half of their assets to sustainable investments as defined under the EU’s anti-greenwashing rules, the Sustainable Finance Disclosure Regulation (SFDR). 

But in an update on Thursday, drawing on feedback from the market, the financial regulator stated that it “no longer considers that this threshold should be retained”. 

Major investors criticised ESMA’s proposal following its consultation, which ended in February, claiming that the timing of the proposals is bad, that they are based on unclear definitions and that they may not be needed.   

In its update, ESMA also confirmed that the adoption of the guidelines has been postponed as it awaits the outcome of the reviews of the Alternative Investment Fund Managers Directive (AIFMD) and undertakings for collective investment in transferable securities (UCITS) directive.

As previously reported, the provisionally agreed legal text contains new mandates for ESMA to take steps to prevent misleading fund names.

The fund names guidelines are expected to be approved and published in Q2 2024, subject to the timing of the publication of the AIFMD and UCITS revised texts.

The intervention now, ESMA added, was to “highlight the key content of the guidance that it intends to provide”.

In lieu of the 50 percent threshold, ESMA is now suggesting that funds using sustainability-related terms in their names should be brought into line with the proposed requirements for funds with ESG fund names. That is, at least 80 percent of assets are directed towards meeting environmental or social characteristics, or sustainability objectives defined in the strategy. 

In October, RI reported that several market observers had predicted that the 50 percent threshold would likely be dropped in ESMA’s final proposal. 

Under the update, funds with sustainability-related names will also be expected to apply the exclusions contained in the EU Paris-aligned Benchmark (PAB) and “invest meaningfully” in sustainable investments as defined under SFDR, “reflecting the expectation investors may have based on the fund’s name”. 

Transition category floated

ESMA has also suggested introducing a new category for funds using transition-related terms, in recognition that the fossil fuel exclusions linked to PAB “could unnecessarily penalise some funds using terms in their name that are not environmental or that focus on transition strategies”. 

Such funds would be subject to the exclusions linked to the EU’s Climate Transition Benchmark, which do not bar investments in fossil fuels as the PAB equivalent does.  

ESMA said that the guidelines will take effect three months after publication.  

Managers of new funds will be expected to comply with the guidance from that date. Funds that predate the introduction of the guidelines will have six months to comply.