Fund naming guidelines on ESG: last sprint in the 21 May deadline - are you ready?

A fund's name plays a key role in sharing important information with investors and acts as a vital marketing tool shaping and influencing investment decisions. In recent years, there has been a significant rise in funds that promote environmental and social characteristics, reflecting growing investor interest. By the end of 2024, funds promoting ESG characteristics (Article 8) and those with a sustainable investment objective (Article 9) accounted for EUR 6.1 trillion in assets, representing 60% of the total market share¹ . This growing trend has raised concerns about the potential for misleading sustainability claims and the risk of greenwashing, especially when funds’ names refer to green or socially sustainable without meeting adequate standards.

With the aim to address these concerns, the ESMA Fund Naming Guidelines²  were published in August 2024. Applicable since 21 November 2024 to new funds, these guidelines granted existing funds additional six months – until 21 May 2025 – to comply with the new rules. The Guidelines aim to protect investors from unfounded and overstated sustainability claims in fund names and to establish clear, quantifiable standards for asset managers to evaluate when ESG or sustainability-related terms can be used in fund names. 

On 21 October 2024, the CSSF published Circular 24/863³ on the application of the ESMA guidelines. To facilitate the update of pre-contractual documentation, the CSSF launched a priority processing  procedure⁴ (“PPP”) for existing UCITS and AIFs that limit the update of their issuing document/prospectus to amendments required in the context of the entry into force of the Guidelines.

The Guidelines apply to a wide range of investment fund managers (IFMs) managing UCITS or AIFs, regardless of whether they disclose under SFDR Articles 6, 8, or 9.

Understanding ESMA guidelines

The Guidelines categorize the fund names in three distinct categories, coming with a set of requirements. Funds using transition, social or governance related terms must allocate at least 80% of their investments towards products promoting environmental or social characteristics. They also have to exclude investments in companies involved in controversial weapons, the production of tobacco or those benchmark administrators find in violation of the UNGC principles and/or the OECD Guidelines for multinational enterprises. 

On top of that, funds using environmental or impact terms must further exclude investments in companies deriving a significant portion of their revenue from coal, oil, or gas-related activities. The most ambitious category, funds using words derived from “sustainability” should apply all above criteria and must additionally demonstrate a meaningful commitment to sustainable investments.

If a fund does not comply with these requirements, it will need to decide whether to change the fund name or amend the investment strategy and composition of the fund to meet the conditions, and keep in mind that any deviation will be considered a rule breach. 

Getting ready for 21 May - A two-step approach

The CSSF emphasizes that the list of ESG and sustainability-related terms in the Guidelines is not exhaustive, meaning that financial market participants must individually assess whether the Guidelines apply to all financial products they manage. In all cases full transparency on the rationale behind ESG-related fund names are required, eliminating the reliance on broad sustainability claims without substantive evidence.

Fund managers will need to assess all existing fund names and relevant documentation against the ESMA guidelines to identify any discrepancies or areas of non-compliance. In case a fund name change is required, fund managers will need to file the PPP for existing funds and consider necessary amendments to the SFDR disclosures and marketing materials of the fund.

Additionally, there are measures fund managers can take beyond immediate compliance to maintain alignment with evolving regulations. Investing in training sessions for product development teams with workshops focused on the fund naming guidelines will help ensure that teams are fully informed and capable of applying the new standards in future product developments. Internal controls should be established to verify continuous compliance with the ESMA guidelines criteria, based on the fund name’s category, documented in the policies and processes of the entity. Regular monitoring will be essential to ensure that funds continue to meet the guidelines’ requirements over time. Finally, clear communication with key stakeholders is critical; fund managers must ensure that investors understand fund name changes and strategy shifts, reinforcing transparency and trust.

Clarity or complexity?

The regulatory update aims to combat greenwashing and enhance investor transparency, but it also introduces significant challenges that require strategic decision-making. 

While the guidelines aim to enhance transparency, they pose an ultimatum: adapting the fund’s strategy or adapting its name. 

This presents a particular challenge for funds with an ambitious definition of sustainable investments: in its Q&A⁵ of December 2024, ESMA states that a fund is only considered to be “meaningfully investing in sustainable investments” if at least 50% of its portfolio qualifies as such. However, since as per SFDR Article 2(17),⁶  there is not a formal definition of sustainable investment, a stricter internal definition – one that aligns with a more rigorous sustainability ambition – could paradoxically result in a lower percentage of qualifying sustainable investments. As a result, highly ambitious funds risk being penalized by their own high standards, facing the difficult choice of either diluting their sustainability strategy to meet the threshold or giving up on the use of a sustainability-related fund name.

Adapting the investment strategy would require a fundamental shift in how a firm defines and integrates sustainability, which may not be desirable – or even feasible – for firms that have built their reputations on strong ESG commitments; it entails significant efforts and a reconsideration of previous engagements, leading many market players to often choose the alternative of adapting the fund names. 

However, changing the fund name has far-reaching consequences; as each firm operates under one uniform definition of sustainable investment renaming funds would mean having to align processes, internal controls and SFDR disclosures across the entire fund range. Funds with a strong sustainability ambition may need to adjust their approach to ensure both compliance and alignment with their sustainability objectives. 

Fund managers must carefully balance compliance, integrity, and strategic positioning to thrive in this new regulatory framework and will play a central role in shaping the future of sustainable future. As the implementation of the Guidelines is nearing its end, the industry will likely see a transformation in how ESG investments are structured, communicated and positioned.