European Securities and Markets Authority publishes Q&As on application of guidelines on funds' names using environmental, social, and governance or sustainability-related terms

The European Securities and Markets Authority has published three sets of Q&As to provide further detail on the guidelines on funds which use ESG or sustainability-related terms in their names. The guidelines relate to requirements under the Undertakings for Collective Investment in Transferable Securities Directive, the Alternative Investment Fund Managers Directive, and the Cross-Border Distribution of Investment Funds Regulation to act honestly and fairly in conducting their business and to ensure marketing communications are fair, clear, and not misleading. The Q&As have been published separately for UCITS and AIFs but are identical in content.

The Q&As clarify that:

• investments issued under the European Green Bonds Regulation will not be caught by the investment restrictions which prevent funds that use ESG-related terms from investing in certain companies (e.g., those involved in controversial weapons activities, tobacco production, and coal or lignite mining). For other green bonds, fund managers may use a look-through approach to assess the underlying activities financed by the instruments;
• national regulators may not find that funds that contain less than 50% of sustainable investments are "meaningfully investing in sustainable investments" (which the guidelines view as a necessary commitment for funds using "sustainable" terms); and
• when applying the exclusions related to controversial weapons, national regulators may (in the absence of other clarification) refer to the list of controversial weapons provided in SFDR principal adverse impact indicator 14.

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