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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United Kingdom | Publication | juillet 2024
In May 2024, the European Securities and Markets Authority (the ESMA) published its eagerly anticipated final guidelines on funds’ names using environmental, social and governance (ESG) or sustainability-related terms. In August 2024, ESMA published the official translations of the guidelines which means that they will start to apply from 21 November 2024. Asset managers should therefore be taking urgent steps to ensure that they comply with them.
Investor demand for investment funds that incorporate ESG factors have grown and will continue to grow in the future. In this context, the name of a fund is important as it is usually the first fund’s attribute that investors see with the potential to have a significant impact on their investment decisions. Financial services regulators are aware of this and have concerns regarding the risks of greenwashing from this point of view.
On 31 May 2022, ESMA issued a supervisory briefing on sustainability risks and disclosures in the area of investment management (the Briefing) containing inter alia principles-based guidance on fund names with ESG and sustainability-related terms. The Briefing was issued under Article 29(2) of the Regulation establishing the ESMA1 meaning that it was intended to promote common supervisory approaches and practices but it was not binding with Member State competent authorities (NCAs) not subjected to a comply or explain mechanism.
Almost six months later ESMA followed up the Briefing with a consultation on draft guidelines on funds’ names using ESG or sustainability-related terms (the Consultation). The draft guidelines contained more specific guidance on the issue compared to the supervisory briefing.
The Consultation closed on 23 February 2023 with ESMA expecting to issue the final guidelines relatively quickly thereafter by Q2 / Q3 2023. However, given the significant amount of feedback from the market the publication of the final guidelines was delayed and it was not until 14 May 2024 that they were published. The final guidelines (Guidelines) are issued under Article 16 of the Regulation establishing the ESMA meaning that unlike the Briefing NCAs are subject to a comply or explain mechanism.
The Guidelines introduce quantitative thresholds (e.g., proportion of ESG related investments and/or sustainable investments) that will apply as a condition for funds using ESG and/or sustainability related terms in their names, as well as minimum safeguards (including the exclusion criteria defined in Commission Delegated Regulation (EU) 2020/1818 of July 17, 2020) depending on the type of terms used by a fund in its name.
The Guidelines apply to (i) management companies of undertakings for collective investment in transferable securities (UCITS) within the meaning of the UCITS Directive2, including UCITS which have not designated such management company (i.e. internally managed UCITS), (ii) alternative investment fund managers (AIFMs) within the meaning of the Alternative Investment Fund Managers Directive (the AIFMD), including internally managed alternative investment funds3 (AIFs) within the meaning of the AIFMD, as well as (iii) the managers of European Venture Capital Funds, European Social Entrepreneurship Funds, European Long-Term Investment Funds and Money Market Funds and (iv) NCAs.
There remain some uncertainties around the exact scope of application of the final guidelines which will require further clarification from ESMA.
These include:
Also in terms of scope, it is worth noting that the Guidelines do not capture all the financial products captured by the Sustainable Finance Disclosure Regulation4 (SFDR), which has a much broader scope, leaving a strange gap between the two.
As for the content of the Guidelines, funds are bucketed into three categories, depending on the type of terms used in their name:
Each of the above-mentioned categories share a common requirement: 80 per cent of the relevant fund’s investments should be used to meet the environmental or social characteristics or sustainable investment objectives (the Threshold) in accordance with the binding elements of the investment strategy disclosed in Annexes II and III of Commission Delegated Regulation (EU) 2022/1288, which supplements the SFDR (the SFDR Level 2).
In addition, if a fund belongs, or contemplates belonging to, (i) Category 1, it should apply Climate Transition Benchmark (CTB) exclusions6, and (ii) Category 2 and/or 3, it should apply the Paris-aligned Benchmark (PAB) exclusions7, noting that:
It is important to note that if a fund combines terms from Category 1 and Category 2 in its name, the requirements of each these categories apply cumulatively, except for those terms combined with any transition related terms (where only the requirements under Category 1 and 2 above apply).
The Guidelines recommend that NCAs consider the above-mentioned rules throughout the life of a fund (with investors being able to verify this information through the periodic disclosures provided in accordance with the SFDR Level 2), and that a temporary deviation from the applicable thresholds/conditions, if the said deviation is not due to a deliberate choice of the asset manager, should be treated as a passive breach and corrected in the best interests of investors. Each NCA will have to define what they consider a passive breach in light of the foregoing.
The Guidelines also give examples of what NCAs should consider (subject to the relevant circumstances) as warranting further investigation and a supervisory dialogue with the relevant fund manager, such as:
On 21 August 2024, ESMA published on its website the Guidelines in all EU official languages starting the clock as to when they will apply:
Finally, it should be kept in mind that ESMA highlights in the Guidelines that “it should be noted that these guidelines have been designed in light of the current legislative framework. ESMA will review the guidelines, if necessary, in case of any update of the relevant legislation”.
Whilst we expect Member States to comply with the Guidelines fund managers should keep an eye on the notifications that Member States make to ESMA by 21 October 2024. Where a Member State has communicated to ESMA that it will comply with the Guidelines or intends to comply with the Guidelines, fund managers should carefully note how such compliance will be locally expected.
If they have not already done so, fund managers should assess whether or not they fall within the scope of the Guidelines.
For those fund managers that are in scope, the next task is to identify those funds containing ESG or sustainability related terms in their names. One of the key points to note when doing this analysis is that it includes names that are not already provided as an example in the Guidelines but give investors the impression that they have environmental, transition, social and/or governance meanings. Firms will therefore need to think about this carefully. There may be instances where it will not be clear whether a term is or is not within scope and we can assist in these matters based on our experience working with NCAs.
Having identified those funds, fund managers then need to change the name of the fund to bring it outside the Guidelines (which may need investor consent) or review the fund’s investment strategy and legal documentation (including its SFDR disclosures) to ensure compliance with the Guidelines. We can assist with these steps too.
Regulation (EU) No 1095/2010 of the European Parliament and of the Council of November 24, 2010
Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 relating to UCITS
Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on alternative investment fund managers
Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability related disclosures in the financial services sector
CTB exclusions are those contained in Article 12(1)(a)-(c) of the Benchmark Regulation.
PAB are contained in Article 12(1)(a)-(g) of the Benchmark Regulation, and include:
(a) companies involved in any activities related to controversial weapons;
(b) companies involved in the cultivation and production of tobacco;
(c) companies that benchmark administrators find in violation of the United Nations Global Compact (UNGC) principles or the
Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises;
(d) companies that derive 1 % or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite;
(e) companies that derive 10 % or more of their revenues from the exploration, extraction, distribution or refining of oil fuels;
(f) companies that derive 50 % or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels; and
(g) companies that derive 50 % or more of their revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh.
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