The European Securities and Markets Authority (ESMA) has introduced stringent new guidelines regulating the use of ESG and sustainability-related terms in investment fund names, prompting a significant wave of fund renaming and asset reshuffling across the European Union. These rules, designed to combat greenwashing and increase transparency, require funds to allocate at least 80% of their assets to sustainable investments and exclude controversial sectors such as fossil fuels, tobacco, and weapons. The enforcement deadlines—November 21, 2024, for new funds, and May 21, 2025, for existing ones—have already led to a notable drop in funds using sustainability claims in their names, marking a pivotal shift in the EU’s sustainable finance landscape.
ESMA’s New Guidelines: Key Provisions and Objectives
Preventing Greenwashing Through Clear Naming Rules
On May 14, 2024, ESMA published its final report on “Guidelines on funds’ names using ESG or sustainability-related terms,” setting clear criteria for funds wishing to use such terminology in their names. The core objective is to prevent misleading or ambiguous fund names that could misinform investors, ensuring that sustainability claims are backed by substantive investment practices.
Mandatory Sustainability Thresholds and Exclusions
Under the guidelines, funds incorporating ESG, sustainability, or related terms in their names must invest at least 80% of their assets in sustainable investments aligned with environmental or social objectives. Additionally, funds must exclude investments in companies involved in controversial sectors, including arms manufacturing, tobacco, and fossil fuel extraction beyond defined revenue thresholds (e.g., more than 10% from oil, 1% from coal, or 50% from gas).
Deadlines and Scope of Application
The guidelines apply to a broad range of investment vehicles, including UCITS, AIFs, EuVECA, EuSEF, ELTIF, and money market funds, as well as their managers. New funds launched on or after November 21, 2024, must comply immediately, while existing funds have until May 21, 2025, to align their names and portfolios accordingly.
Impact on the Investment Fund Market
Significant Decline in Sustainability-Related Fund Names
Since the guidelines’ announcement, the number of funds using sustainability or ESG-related terms in their names has dropped by approximately 20% across the EU. Morningstar estimates that if all funds retained their sustainability-related names without meeting the new criteria, divestments could total up to $40 billion, underscoring the scale of the market adjustment underway.
Asset Reallocation and Fund Renaming Trends
Analysis by Clarity AI reveals that over 40% of funds with ESG or sustainability labels will need to either divest assets or rename themselves to comply with the new rules4. Among 3,256 EU-domiciled funds studied, 74% were classified as Article 8 (promoting environmental or social characteristics), 19% as Article 9 (sustainable investment objectives), and 7% as Article 6 (non-ESG). Notably, 44% of these funds held investments breaching Paris-aligned Benchmark (PAB) exclusion criteria, primarily due to fossil fuel exposure and controversial sectors.
Shift Toward Transition-Focused Funds
While environmental and ESG-related fund names declined by 10% and 12% respectively, there was a 4% increase in funds adopting “transition” in their names. This reflects a growing investor interest in transition funds aligned with EU Climate Transition Benchmarks, which allow some fossil fuel investments under strict conditions.
Industry and Regulatory Reactions
Challenges for Fund Managers
Tom Willman, Regulatory Lead at Clarity AI, highlighted the practical difficulties funds face in meeting the 80% sustainable investment threshold and applying PAB exclusions. He emphasized the importance of robust data collection to avoid investments in excluded sectors such as tobacco and controversial weapons.
Enforcement Approaches Across EU Member States
While ESMA coordinates supervision, enforcement is carried out by national competent authorities (NCAs), resulting in varied enforcement strategies. Some countries, like Austria and Belgium, have adopted stringent measures including fines up to €60,000 and administrative orders for non-compliance. Others, such as Luxembourg and Italy, favor supervisory dialogue and corrective action without immediate penalties.
ESMA’s Commitment to Transparency and Investor Protection
The guidelines are part of ESMA’s broader sustainable finance agenda aimed at enabling investors to make informed decisions and supporting the EU’s climate and sustainability goals. By ensuring that fund names accurately reflect their investment strategies, ESMA seeks to restore investor confidence and reduce greenwashing risks.
What Fund Managers Need to Do Next
Immediate Compliance for New Funds
New funds launched after November 21, 2024, must comply with the guidelines from inception, ensuring their names and investment strategies align with the 80% sustainability threshold and exclusion criteria.
Renaming and Portfolio Adjustments for Existing Funds
Funds existing before November 21, 2024, must complete necessary changes by May 21, 2025. This includes renaming funds that no longer meet the criteria and divesting from non-compliant assets.
Transparent Communication and Documentation
Managers must ensure that marketing materials, prospectuses, and disclosures accurately represent the fund’s sustainability characteristics and objectives, supported by verifiable data.
The new ESMA guidelines on ESG and sustainability-related fund names represent a watershed moment for sustainable finance in Europe. By imposing rigorous asset allocation thresholds and exclusion criteria, the rules aim to eliminate misleading sustainability claims and enhance transparency for investors. The resulting wave of fund renaming and portfolio reshaping underscores the challenges and opportunities for fund managers navigating the evolving regulatory landscape. As the May 2025 deadline approaches, the investment community is witnessing a decisive shift toward genuine sustainability commitments and clearer communication, setting a new standard for responsible investing in the EU.
