ESMA publishes translations of its guidelines on funds’ names
The European Securities and Markets Authority (ESMA) published translations in all official EU languages of its Guidelines on funds’ names using ESG or sustainability-related terms (the Guidelines) on 21 August 2024. This triggers the application of the Guidelines.
The key dates by which funds will need to adapt and comply are:
The objective of the Guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names.
The Guidelines apply to UCITS management companies, including any UCITS which has not designated a UCITS management company, Alternative Investment Funds Managers (AIFMs) including internally managed AIFs, EuVECAs, EuSEFs, and ELTIF and MMF managers (and competent authorities).
We provide an overview of the new rules contained in the Guidelines here.
Updated SFDR Q&A published
The European Supervisory Authorities (ESAs) published an updated version of the consolidated questions and answers (Q&A) on the Sustainable Finance Disclosure Regulation (SFDR).
The clarifications include:
Scope issues
Q&A 4 clarifies that registered AIFMs are required to comply with the website information requirements of Article 10 SFDR for any Article 8 and Article 9 funds. This can be on the website of the fund or of the group to which the AIFM belongs if it corresponds to the website of the AIFM. If there is no website, the AIFM should establish one. The ESAs emphasise that the information must be easily accessible to investors, should be kept up to date, and any revisions or changes to such information should be clearly explained.
Q&A 5 clarifies that if a financial market participant (FMP) discloses that “it deems sustainability risks not to be relevant” for a product, it cannot disapply other EU law obligations on taking into account sustainability risks e.g., the AIFM or UCITS management company must also take account sustainability risks when complying with the ESG related changes to the UCITS Directive and AIFMD.
PAI disclosures
Q&A 26 confirms that the calculation of principal adverse impact (PAI) indicator 4 in Table 1, Annex I (“Exposure to companies active in the fossil fuel sector”) is on a pass/fail basis and a company is considered to be active in the fossil fuel sector as soon as it derives any revenues from any of the activities in the definition.
Q&A 27 confirms that the calculation of PAI indicator 6 in Table 1, Annex I (“Energy consumption intensity per high impact climate sector”) should be performed so that each high impact sector is aggregated and disclosed separately.
Q&A 28 clarifies that FMPs should use the exchange rate at the end of the fiscal year end for currency conversions into € for all reference points (quarterly calculation and enterprise valuation).
Q&A 29 addresses the question of how FMPs should include financial emissions from investments through products (e.g., a UCITS) under FMPs scope 1, 2 or 3 GHG emissions (PAI indicator 1 of Annex 1).
Financial product disclosures
Q&A 20 explains the methodology for the calculation of the proportion of taxonomy-aligned investments in product pre-contractual and periodic templates and provide illustrative examples.
Q&A 21 includes a table showing hypothetical examples of how calculations of sustainable investments can be made either at the economic activity level or the investment level.
Q&A 22 addresses the question of whether a sustainable investment can be made by investing in another financial product e.g., UCITS fund. The ESAs clarify that if a product invests in other products that make sustainable investments with potentially differing applications of Article 2(17) SFDR, the FMP should ensure that the underlying investments comply with its own application of Article 2(17) SFDR.
Q&A 23 clarifies that delegation has no impact on the FMP’s responsibility to ensure compliance of investments with the definition of sustainable investments in Article 2(17) SFDR (likewise for products using the sustainable investments definition of an index provider). This does not change the Commission’s previous answer that products that passively track a PAB or CTB are deemed to have sustainable investments as their objective and to make sustainable investments.
Q&A 24 clarifies when efficient portfolio management (EPM) techniques and money market funds (MMFs) can be “investments” for certain specific purposes such as hedging or liquidity (for products disclosing under Article 9 SFDR).
Q&A 25 confirms that SFDR disclosure requirements apply equally to products that passively track PABs or CTBs.
Q&A 26 includes the ESAs supervisory expectation for FMP’s Article 10 website disclosures that the obligation to publish the information referred to in Article 8, 9 and 11 SFDR should be fulfilled by publishing the templates in Annexes II-V.
Q&A 27 confirms that where a fund invests in real assets (like cars or real estate) through a SPV or holding company, good governance checks do not have to be made.
Q&A 28 confirms (in line with previous Q&A V.7) that Article 9(3) SFDR is neutral in terms of product design, therefore products that have an objective of reduction in carbon emissions can fall within Article 9(3) SFDR whether they use a passive or active strategy.
ESMA opinion on the functioning of the sustainable finance framework
ESMA published an opinion on the sustainable finance regulatory framework, setting out recommendations for improving the usability and coherence of the EU sustainable finance framework. ESMA’s opinion builds on the findings of the May 2023 ESMA Progress Report on Greenwashing (discussed here) and represents the last component of ESMA's reply to the May 2022 EC Request for input related to greenwashing, and ESMA’s June 2024 Final Report on Greenwashing. It is broadly aligned with the June 2024 Joint ESAs Opinion on the review of the SFDR (discussed here).
In terms of timing of the European Commission’s ongoing comprehensive review of the framework, the European Parliament study on The current Implementation of the SFDR with an assessment on how the legislative framework is working for retail investors notes that a legislative proposal from the European Commission to amend the SFDR is expected shortly after the next Commission begins its term (Q3 2024).
More detail on ESMA’s recommendations for the European Commission:
Consumer and industry testing is consistently identified as critical.
European Commission adopts ELTIF Regulation RTS
On 19 July 2024, the European Commission adopted a Delegated Regulation supplementing the Regulation on European Long-Term Investment Funds (EU) 2015/760, as amended by Regulation (EU) 2023/606) (ELTIF 2.0) containing regulatory technical standards (RTS) and accompanying annexes, specifying:
For ELTIFs that offer redemption facilities during the life of the ELTIF (an open-ended with limited liquidity ELTIF), the RTS set out the maximum percentage of liquid assets that can be used for redemption requests. The manager of the ELTIF can elect to calibrate that percentage on the basis of either:
Read more about the RTS in our related insight, which includes more detail on the key provisions for managers of ‘open-ended’ ELTIFs (e.g., minimum holding period, redemption requirements, LMTs).
Next steps
The Delegated Regulation adopted by the Commission is not final. It is now subject to a three-month scrutiny period by the European Parliament and Council. In the absence of objections, the Delegated Regulation will apply on the day following its publication in the Official Journal of the EU, which is expected to be in Q4 2024.
For more information on these topics please contact any member of A&L Goodbody's Asset Management & Investment Funds team.
