In a report dated July 25, 2024, BaFin announced that it will take the guidelines for fund names of the European Securities and Markets Authority (ESMA) into account in its administrative practice. These will completely replace BaFin’s previous administrative practice on sustainable investment funds. Below we therefore give you an overview of the background, content and practical consequences of the guidelines for fund names and BaFin’s new administrative practice.
1. Background
On May 14, 2024, the European Securities and Markets Authority (ESMA) published its final report on investment funds that use terms such as “environment”, “social”, “governance” or other sustainability-related terms in their names. The background to this was the significant increase in demand for “sustainable” investment funds in recent years and the associated fear of greenwashing, which could be particularly threatening if funds contain ESG terms in their names whose investment strategy does not justify this. ESMA had already published a corresponding consultation on this in October 2022, which was completed in February 2023. In addition, the new versions of the AIFM and UCITS directives contain an order for ESMA to issue guidelines on when fund names are unclear, unfair or misleading.
BaFin has now announced in a report dated July 25, 2024 that it will take ESMA’s guidelines for fund names into account in its administrative practice. These will completely replace BaFin’s previous administrative practice on sustainable investment funds. Two years ago, BaFin had already established an administrative practice for the use of sustainability terms in the names of German retail funds. The ESMA guidelines now apply to all funds regulated or distributed in the EU, including special funds that can only be purchased by professional investors.
2. Contents
Asset management companies must ensure that the information on their products is accurate, fair and clear and does not convey a misleading or confusing message that would wrongly influence investors. The ESMA guidelines therefore initially distinguish between three groups of terms:
- Transition, social or governance related terms,
- Environmental or impact-related terms,
- Sustainability-related terms.
All investment funds that use the above terms in their names (e.g. “impact”, “sustainable”, “green”, “ESG”, “social equality”, “net-zero”, etc.) must invest at least 80% of the fund assets in accordance with the binding sustainable elements of the investment strategy or the characteristics that give the fund its name.
In addition, depending on the terminology in the fund name, certain minimum exclusions must be complied with according to the so-called “Climate Transition Benchmark” (CTB) or the so-called “Paris Aligned Benchmark” (PAB). Finally, in the case of impact, sustainability or transition-related funds (names), there must be a measurable ecological or social impact (“impact”), a sustainable investment within the meaning of Art. 2 (17) of the Disclosure Regulation (“sustainability”), or a measurable path to ecological or social transition (“transition”).
3. Practical implications / need for action
According to their wording, the ESMA guidelines are applicable three months after their publication in the EU Official Journal. This is still pending. The guidelines will then apply immediately to newly launched funds, while a six-month transition period will apply to existing funds. No exceptions are provided for (old) funds that are no longer on the market.
However, from now on, BaFin will only take the requirements of the ESMA guidelines into account when processing all new applications. This means that the mere presence of sustainability terms in the fund name justifies an examination of the investment conditions to ensure that the above requirements are met. The question of whether a fund is marketed as “explicitly sustainable” and qualifies as an “Article 8” or “Article 9” fund is irrelevant in this context.
Even newly launched “Art. 6” funds would therefore have to comply with the above requirements in their investment conditions if they have one of the above-mentioned designations in the fund name. The same applies to newly launched “Art. 8” or “Art. 9” funds. These must also – as before – contain the ESG form annexes on ecological and/or social characteristics or on sustainable investment objectives as an appendix to the prospectus.
For existing funds, the above requirements only apply nine months after the guidelines have been published in all official EU languages on the ESMA website. If the fund name contains a designation that falls under the ESMA guidelines, then either the name of the fund must be changed or the investment conditions must be adjusted in accordance with the above criteria. However, BaFin generally does not view an adjustment of the investment conditions as a change in the investment principles or as a change to essential investor rights that is detrimental to investors within the meaning of Section 163 (3) and (4) KAGB. This applies in particular if the investment conditions already meet the requirements of BaFin’s previous administrative practice on sustainable investment funds. This also applies if the information in the pre-contractual ESG annex to the sales prospectus of funds that disclose their sustainability characteristics in accordance with Article 8 or Article 9 of the EU Disclosure Regulation already contains minimum commitments and exclusion criteria as binding features of the ESG strategy that are comparable to the exclusions in the ESMA guidelines.
4. Conclusion
The ESMA guidelines and their application by BaFin mean that fund initiators and managers need to take action if ESG or sustainability-related terms are (or are to be) used in the fund name. This applies to both newly launched products and existing funds. Despite the uniform and newly introduced threshold of at least 80% of the fund’s assets, which must be invested in accordance with the characteristics that give the fund its name, questions of interpretation remain open that still need to be clarified in practice. If you have any questions, please feel free to contact us at any time.
