Family Office Insights: EU Securities Regulator Releases Final Guidelines on Investment Fund Names Using Environmental, Social and Governance (ESG) or Sustainability-related Terms

The first impression that an investment fund gives to prospective investors is usually its name, and this first impression can often play a role in an investor’s decision to explore a potential investment further. With this in mind, and with heightened investor demand for ESG-focused funds, fund sponsors have an incentive to include sustainability-related or generic ESG terms in their names. These name choices can make it difficult for investors to verify that a fund’s actual investments align with the fund’s name and have increased the risk of “greenwashing,” or misleading investors as to what a fund’s sustainability standards truly are.

Given these risks and difficulties, the European Securities and Markets Authority (ESMA), which is the EU’s principal financial markets regulator and supervisor, released its final guidelines (Guidelines) on May 14, 2024 on the use of ESG or sustainability related terms in investment fund names – clearly interlinked with the obligation for marketing communications to be fair, clear and not misleading under the MiFID II regulations.