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ESMA publishes first Q&As on the application of the Guidelines on funds’ names using ESG or sustainability-related terms

20 January 2025

ESMA has published its first Q&As clarifying questions it has been sent on the topics of (i) green bonds, (ii) meaningfully investing in sustainable investments and (iii) controversial weapons. We discuss what these clarifications mean in practice below.

On 13 December 2024, the European Securities and Markets Authority (ESMA) published Q&As (the Q&As) giving guidance for the practical application of the Guidelines on funds’ names using ESG or sustainability-related terms (the Guidelines).

The Q&As cover the following topics (there are two identical answers published for each topic – one for each of UCITS and AIF):

green bonds;
meaningfully investing in sustainable investments; and
controversial weapons.

Green Bonds – can a look-through approach be applied?

Paragraphs 16-18 of the Guidelines set out requirements for funds using sustainability-related terms, environmental- or impact-related terms or transition-, social- and governance-related terms in their fund names. These requirements include a 80% threshold linked to the proportion of investments used to meet environmental or social characteristics or sustainable investment objectives (depending on whether the fund is disclosing under Article 8 or Article 9 of the Sustainable Finance Disclosure Regulation) and a list of excluded investments in companies.

There has been an ongoing question as to whether use-of-proceeds green bonds should be considered to be sustainable investments as the proceeds are used for a green purpose or whether it is necessary to analyse the issuers of these bonds. The Q&As confirm that:

for European Green Bonds issued under the Green Bond Regulation (Regulation (EU) 2023/2631), investments do not need to be assessed under the exclusions of investments referred to in paragraphs 16-18 of the Guidelines¹ because they already enjoy the protection of the legal framework for EU Green Bonds; and
for other types of use-of-proceeds instruments not issued under the Green Bond Regulation, a look through approach should be applied to ensure that the proceeds do not finance any activities referred to in Article 12(1)(a)-(b) and (d)-(g)¹ of the Commission Delegated Regulation (EU) 2020/1818 supplementing the EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks Regulation (Article 12(1)).Investments in companies excluded under Article 12(1) would not be able to benefit from this look through approach – they will always be excluded.

Construing “meaningfully investing in sustainable investments”

The Q&As confirm that whilst the assessment of whether a fund “meaningfully investing in sustainable investments” should be carried out on a case-by-case basis by competent authorities, they may find that investment funds with sustainable fund names investing in less than 50% of the proportion in sustainable investments are not “meaningfully” investing in sustainable investments. Though this amount could be higher depending on the context.

Controversial weapons – how should exclusions related to controversial weapons be applied?

The Q&As confirm that controversial weapons referred to in Article 12(1) should be interpreted by reference to the list of controversial weapons provided in indicator 14 of Table 1 of Annex I of Commission Delegated Regulation (EU) 2022/1288 containing the regulatory technical standards under the SFDR in the absence of any other clarification. So: anti-personnel mines, cluster munitions, chemical weapons and biological weapons.

Next Steps

These Guidelines have applied from 21 November 2024 and these are the first Q&As published in relation to the Guidelines. We expect more questions to be answered over the coming months as fund managers try to apply the requirements to their fund names.

Our global Sustainable Finance & Investment group brings together a multidisciplinary global team that provides clients with best-in-market support. We are following supervisory matters in relation to the EU Taxonomy, SFDR and CSRD very closely so please get in touch if you would like to discuss. This note is intended to be a general guide and covers questions of law and practice. It does not constitute legal advice.

Authored by Emily Julier and Rita Hunter.

References

1 Paragraphs 16-18 of the Guidelines refer to investments in companies referred to in Article 12(1)(a) to (c) of Commission Delegated Regulation ((EU) 2020/1818) supplementing Regulation (EU) 2016/1011 as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks for funds using transition-, social- and governance-related terms in their names and Article 12(1)(a) to (g) for funds using environmental-, impact- or sustainability-related terms in their fund names.

Articles 12(1)(a) to (b) list companies involved in any activities related to controversial weapons and the cultivation and production of tobacco.
Article 12(1)(c) lists companies found in violation of the UN Global Compact principles or OECD Guidelines for Multinational Enterprises).
Articles 12(1)(d) to (g) list companies that derive (i) 1% or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite, (ii) 10% or more of their revenues from the exploration, extraction, distribution or refining of oil fuels, (iii) 50% or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels and (iv) 50 % or more of their revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh.