The European Securities and Markets Authority proposes to restrict ESG- and sustainability-related terms in the naming of funds, with an eye on the US and UK fund naming regimes.

By Paul Davies, Nicola Higgs, Anne Mainwaring, and Dianne Bell

On 18 November 2022, the European Securities and Markets Authority (ESMA) published its consultation paper on guidelines in relation to funds’ names, including quantitative thresholds that would need to be met before ESG- and sustainability-related terminology can be used in funds’ names. The proposed rules would set common standards for AIFMs[1] and UCITS[2] management companies when promoting AIFs and UCITS using an ESG- or sustainability-related name, including when these funds are set up as EuVECA, EuSEF, and ELTIFs[3] to facilitate marketing of funds throughout EU Member States.

To avoid misleading investors, ESMA believes that ESG- and sustainability-related terms in funds’ names should be supported materially by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund’s investment objectives and policies.

Some of the terminology considered in the proposals (including the examples in the Annexes to the consultation paper) deal with fund names including the following:

  • sustainable
  • impact
  • climate change
  • water (in combination with “sustainable”)
  • biodiversity
  • society (in combination with “sustainable”)

ESMA proposes common standards on the use of certain terminology described below, and seeks stakeholders’ views on a number of questions in this area and in relation to alternative approaches.

Fund names: a powerful marketing tool

The proposals set out ESMA’s current thinking on how best to tackle the fact that a fund’s name is a “powerful marketing tool”. ESMA has taken into consideration data from July 2022 which estimated 14% (4,192 out of 29,701) of EU-domiciled funds used at least one ESG-related word in their names.

In terms of investor responsibility, ESMA notes that a fund’s name communicates information to investors about the fund and is often the first piece of fund information investors will see. Although ESMA makes the point that investors “should go beyond the name itself and look closely at a fund’s underlying disclosures”, it is mainly concerned that a fund’s name can have a significant impact on their investment decisions. The proposed rules therefore aim to manage perceived greenwashing risk by promoting consistency and transparency in fund names.

Quantitative thresholds

ESMA is proposing to achieve alignment between the fund name and investment characteristics or objectives through quantitative thresholds for the minimum proportion of investments used to support the ESG/sustainability-related terms in the fund’s name.

Overview of main elements of proposals

80% minimum proportion If a fund has any ESG-related words in its name, a minimum proportion of 80% of its investments should be used to meet the environmental or social characteristics or sustainable investment objectives in accordance with the binding elements of the investment strategy as disclosed in the pre-contractual and periodic reports applicable to Article 8 and 9 funds under the Sustainable Finance Disclosure Regulation (SFDR).

ESMA believes 80% is a high enough proportion to meet investors’ expectations that a large majority of the fund’s actual or intended investments is made in assets consistent with its name.

50% additional minimum threshold for “sustainable” related terms An additional threshold applies if a fund uses the word “sustainable” or any other sustainability-related term in its name. Within the 80% threshold above, it should allocate at least 50% of the minimum proportion of “sustainable investments” as defined by Article 2 (17) of SFDR (as disclosed in Annexes II and III of SFDR Delegated Regulation). Investments in the 50% minimum proportion will be subject to the SFDR “sustainable investment” test, including DNSH, meaning that they will need to demonstrate double materiality.
Minimum safeguards Minimum safeguards including exclusion criteria defined in the Benchmark Regulation Delegated Regulation (EU) 2010/1818 Article 12(1)-(2) are recommended for all investment funds using an ESG- or sustainability-related term in their names (which includes, by way of example, exclusions in relation to companies involved in any activities related to controversial weapons and companies involved in the cultivation and production of tobacco).
Index funds If funds designate an index as a reference benchmark, ESMA seeks views on requiring the proposed 80% and 50% (as applicable) thresholds set out above to be met by the fund before it can use ESG/sustainability-related words in its name. This requirement would present a particular challenge for passive managers reliant on third-party ESG indices.
Impact funds


The terms “impact” or “impact investing”, or any other impact-related term in a fund name, should only be used if the fund meets the proposed 80% and 50% (as applicable) quantitative thresholds above. In addition, the investments under these minimum thresholds need to be made with the intention to generate “positive” and “measurable” social or environmental impact alongside the financial return.

ESMA is seeking views on other ways to construct the threshold mechanism, or ways to ensure that ESG- or sustainability-related names of funds are aligned with their investment characteristics or objectives. It is interested in views on a range of other related questions, such as whether there should be specific provisions for “transition” or transition-related names in these proposed rules. ESMA is also asking for views on whether derivatives should be subject to specific provisions for calculating the thresholds.

Overlap with SFDR

The proposals are intended not to interfere with the requirements of the SFDR or the EU Taxonomy. However, funds using ESG- or sustainability-related terminology in their names will need to ensure that the asset allocation disclosures in their SFDR pre-contractual and periodic disclosures show alignment with the applicable quantitative thresholds.

Convergence and divergence with other regimes

In its consultation, ESMA points to specific European, US, and UK examples of (or proposed amendments for) criteria creating restrictions around terms used in fund names. (For more information on the US regime, read this Latham Client Alert on the Securities and Exchange Commission’s proposed ESG disclosure requirements for investment advisers and investment companies.)

Whilst ESMA is looking to align with the concept of naming rules, firms will still need to manage divergences across the rules. For example, in the proposed UK SDR regime, naming restrictions will apply to funds that do not qualify for one of the three sustainable investment labels. In comparison, the “sustainable focus” label requires at least 70% of the fund’s assets to either meet a credible standard of environmental and/or social sustainability, or align with a specified environmental and/or social sustainability theme. (Read this Latham blog post for more information on the FCA’s proposed labelling and disclosure rules to combat greenwashing.) Accordingly, the naming rules as currently proposed would be applied differently and would be subject to different thresholds across jurisdictions.

Other sectors

ESMA is also interested in whether these proposals may have implications for other sectors and is seeking views on whether similar guidance should be developed for other financial products.

Next steps

ESMA’s consultation will close on 20 February 2023.

A final version of the proposed rules is expected by Q2 or Q3 2023. The plan is for the new regime to apply three months after publication on the ESMA website. A six-month transition period is also proposed for funds launched prior to the proposed rules coming into effect if those funds use ESG or sustainability-related terms in their names. These funds will then have to bring their investments in line with the quantitative thresholds or change their names to remove ESG/sustainability-related terms.



[1] Alternative investment funds managers (AIFMs) of alternative investment funds (AIFs) under the Alternative Investment Fund Managers Directive (AIFMD).

[2] Directive on Undertakings for Collective Investment in Transferable Securities (UCITS).

[3] Referring to European Venture Capital Funds (EuVECA); European Social Entrepreneurship Funds (EuSEF); and European Long-term Investment Funds (ELTIF).