In a notification dated 25 July 2024, BaFin announced that it will take into account the guidelines for fund names of the European Securities and Markets Authority (ESMA) in its administrative practice. These will completely replace BaFin's previous administrative practice on sustainable investment funds. In the following, we will therefore give you an overview of the background, content and practical consequences of the guidelines for fund names and the new administrative practice of BaFin.
1. Background
On 14 May 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 threaten in particular if funds contain ESG designations 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 include a mandate for ESMA to issue guidance on when fund names are unclear, unfair or misleading.
In a notification dated 25 July 2024, BaFin has now announced that it will take ESMA's guidelines on 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 name of German mutual funds. The ESMA guidelines are now aimed at all funds regulated or distributed in the EU, including special funds that can only be purchased by professional investors.
2. Content
Asset management companies must ensure that the information on their products is accurate, honest, clear and does not convey a misleading or confusing message that would falsely 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 designations (e.g. "impact", "sustainable", "green", "ESG", "social equality", "net-zero", etc.) must invest at least 80% of the fund's assets in accordance with the binding sustainable elements of the investment strategy or the eponymous characteristics.
In addition, depending on the terminology in the fund name, certain minimum exclusions according to the so-called "Climate Transition Benchmark" (CTB) or the so-called "Paris Aligned Benchmark" (PAB) must be observed. Finally, in the case of impact, sustainability or transition-related funds (names), there must be a measurable environmental or social impact ("impact"), a sustainable investment within the meaning of Art. 2 (17) of the Disclosure Regulation ("Sustainability"), or a measurable path to an 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 Official Journal of the EU. This is currently still pending. The guidelines are then to apply directly to new funds to be launched, and a six-month transition period is to apply to existing funds. No exception is provided for (old) funds that are no longer on the market.
However, from now on, BaFin will only take into account the requirements of the ESMA guidelines for the processing of all newly received applications. This means that the mere presence of sustainability terms in the fund name justifies an examination of the investment conditions for compliance with the above requirements. 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 according to their investment conditions if they bear one of the aforementioned designations in the fund name. The same applies to new "Art. 8" or "Art. 9" funds to be launched. As before, these must also contain the ESG form attachments on environmental and/or social characteristics or sustainable investment objectives as an annex to the prospectus.
For existing funds, the above requirements will only apply nine months after the publication of the guidelines in all official EU languages on ESMA's website. If there is a name in the fund name that falls within the scope of the ESMA guidelines, either the name of the fund must be changed or the investment conditions must be adjusted in accordance with the above criteria. As a rule, however, BaFin does not consider an adjustment of the investment conditions to be a change in the investment principles or a change to material investor rights within the meaning of section 163 (3) and (4) KAGB that would disadvantage investors. 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 disclosures in the pre-contractual ESG appendix to the prospectus of funds that disclose their sustainability characteristics in accordance with Article 8 or Article 9 of the EU Disclosure Regulation already contain minimum commitments and exclusion criteria as binding characteristics of the ESG strategy that are comparable to the exclusions of the ESMA Guidelines.
4. Conclusion
The ESMA Guidelines and their application by BaFin require action for fund initiators and managers if ESG or sustainability-related terms are (or should be) used in the fund name. This applies both to new products to be launched and to existing funds. Despite the uniform and newly introduced threshold of at least 80% of the fund's assets, which must be invested according to the characteristics that give it its name, questions of interpretation remain open that have yet to be clarified in practice. Please feel free to contact us at any time if you have any questions.
