ESMA Clarifies ESG Fund Guidelines with Key Q&As for Smooth Implementation

BRUSSELS, 17 December 2024 – The European Securities and Markets Authority (ESMA), ​a regulator of the European Union’s primary financial markets, has ​launched a set of Q manzanam / A to clarify critical aspects of its guidelines on ​fund names using ESG or sustainability terms. Published on 13 December 2024, Q plagaamp; As ​discussed in ​practical areas of application, including the definition of ​”average investment in sustainable investment”, exclusions for controversial weapons and guidelines for green bond investments.

Clarification “significant investment in sustainable investment “

One of the main clarifications provided by ESMA is what constitutes a “significant investment in sustainable investments”. According to Q compartmenteamp; As ​such, EU regulators are responsible for interpreting this threshold as the need for funds to have at least 50% of their assets allocated to sustainable investment. ESMA’s confirmation ​is aligned with its previous consultation ​document ​on the proposed ​guidelines, which initially ​introduced this threshold but omitted it in the final version of the guidelines. Industry stakeholders welcomed this clarification for providing ​more transparency and certainty.

ESMA stated that the ​objective behind setting this threshold is to ensure that funds using ESG or sustainability-related expressions on their behalf do not deceive investors about ​their level of commitment to sustainability. According to ESMA, “funds that allocate less than 50% to sustainable investments cannot be ​considered as significant investments in sustainability”. This rule should lead to market ​coherence and enhance investor confidence in GSS funds.

Guidelines on the exclusion of weapons in conflict

Another ​key area addressed in the areas of exclusion of disputed weapons is the ​exclusion of such weapons. ESMA has ​specified that ​the ​reference ​to ​this exclusion should be in line with the main negative impact ​indicator of ​the Regulation on Sustainable ​Financial Dissemination (SFDR). According ​to this ​indicator, ​investments related to controversial weapons, such as landmines, cluster bombs, chemical and biological weapons, should be ​excluded through ​funds that are considered sustainable or focused on environmentally sound management.

The issue is seen as an essential step towards normalising the definition and treatment of controversial weapons across the ​EU. Fund managers are required ​to align their exclusion policies with the SFDR ​framework, ensuring that investors clearly understand which industries or activities are excluded from their portfolio. By aligning ​with established ​negative impact indicators, ESMA aims to create a coherent regulatory environment for sustainable investment.

Clarifications on green bond investments

ESMA also provided details ​on green bonds, in particular as regards ​the exclusion of companies under ​the Guidelines. According to Component A of Q, exclusion-related investment restrictions do not apply to European green bonds. This exemption is seen as an effort to support the EU green bond rule and to promote investment in sustainable projects across the EU.

For green bonds outside the EU framework, ESMA allows fund managers to apply a “right” approach. This approach allows managers to assess whether green bond activities meet the exclusion criteria ​specified in the guidelines. ESMA’s guidance on this issue provides flexibility while ensuring that fund managers continue to diligently assess the sustainability of their investments. This clarification reflects ESMA’s balanced approach to supporting green financing while ​maintaining investor protection rules.

Ensuring a common understanding in the EU

According to ESMA, the main objective of QTamp; A ​is to ensure smooth implementation of the guidelines by ​promoting a common understanding of key concepts within EU regulators and market ​participants. ESMA pointed out that Qюamp; As ​an essential tool ​to resolve ambiguities that may ​arise in the practical application ​of the Guidelines.

In its official statement, ​ESMA stated: “These QTampamps; ​A is essential to achieve a harmonised interpretation of the Fund Name Guidelines using ESG terms and sustainable development terms. They address the main challenges faced by fund managers and help ensure investor confidence through clear and consistent application ​of the rules.” QTamp; Like providing practical ideas, provide fund managers with much ​needed clarity while navigating the evolving regulatory landscape.

Industry reactions and implications

The publication of the “Q & As” publication was very well received by ​industry stakeholders, in particular to address outstanding issues related ​to ​the Guidelines. The 50% threshold for ​sustainable investments, in particular, was ​described as an important step towards transparency and credibility in the marketing of ESG funds. According to legal analysts, ​the clarification should lead to greater compliance between fund managers ​and reassure investors about the authenticity of funds labelled ​by ESG.

At the same time, harmonization with disarmament, demobilization and reintegration indicators with respect to ​controversial arms exclusions should ​simplify compliance ​by fund managers. According to ​industry experts, the focus on European green bonds reflects the EU’s commitment to ​promoting green financing ​and achieving its broader sustainability objectives. However, the “fair” approach to non-EU green bonds may pose operational problems for some fund managers, who need ​additional due diligence procedures.

In general, Q withamp; As is a critical step in ESMA’s ongoing efforts to strengthen investor protection and promote market ​integrity ​in the ​ESG investment space. By providing detailed guidance on these complex issues, ESMA aims to mitigate the risks associated with green washing and ensure ​that ESM funds meet their promises of sustainability.

As the ESG investment market continues to grow, the clarifications provided by ESMA should play a key role in the ​development of industrial practices. Fund ​managers are encouraged to closely review the guidelines and their policies and processes and follow the clarified guidelines. ​The ​full Q is available on the ESMA’s ​official website.