Reed Smith Client Alerts

Under new European guidance, ESG funds must prove they are in compliance with their ESG promises in order to earn the right to put environmental, social and governance (ESG) and sustainability claims in their fund names. A November paper is important to understanding how to justify claims and avoid repercussions.

Authors: Felicitas Scriba


The European Securities and Markets Authority (ESMA) published the paper Consultation On Guidelines on funds' names using ESG or sustainability-related terms on 18 November 2022, proposing binding rules on the use of ESG- and sustainability-related terms in investment fund names. ESMA is taking comments on this proposal and expects to issue the final Guidelines before the end of 2023.

This paper is part of ESMA’s initiative to safeguard against “greenwashing.” Investor interest in funds with sustainability and ESG at their heart has steadily increased in recent years, and its growth likely will continue. Meanwhile, growing interest in sustainability and ESG has triggered regulator concerns about greenwashing, which is particularly driven by the misleading naming of funds.

A fund’s name is one of its most effective marketing tools, according to ESMA, which references July 2022 data saying that 14% of EU-domiciled funds have at least one ESG-related term in their name. Although ESMA recommends that investors should not base investment decisions solely the name of a fund, ultimately the fund’s name still has significant influence. It is often the first information that investors learn about a fund and contains information that can provoke a decisive first impression.

ESMA’s consultation paper marks a new phase in its anti-greenwashing initiative. Its aim is to create guidelines for the use of fund names that use sustainability- or ESG-related terms. The guidelines will apply to Undertakings for Collective Investment in Transferable Securities management companies and alternative investment fund managers when they use ESG- or sustainability-related terms in their names, including when these funds are set up as European venture capital funds, European social entrepreneurship funds and European long-term investment funds to facilitate marketing of funds throughout EU member states.