A major regulatory deadline is approaching - and fund managers using ESG or sustainability terms in their fund names need to pay attention. 

In May 2024, the European Securities and Markets Authority (ESMA) released its final guidelines on the use of ESG- or sustainability-related terms in fund names. These guidelines aim to improve market integrity and combat greenwashing by setting strict conditions for the use of such terminology. The rules have applied since 21 November 2024 for new funds, with a May 2025 deadline for existing funds, giving managers a limited window to assess compliance and adjust fund names if necessary.

The scope of the ESMA guidance covers all UCITS and AIFs that use ESG-related language in their names, regardless of their classification under the Sustainable Finance Disclosure Regulation (SFDR). Notably, SFDR Article 6 funds are expected to refrain from using ESG, sustainability, or impact-related terminology in their fund names, in line with ESMA’s efforts to ensure that naming reflects underlying investment strategies.

At the core of the guidance is a straightforward yet strict requirement: if a fund uses ESG-related terms in its name, at least 80% of its assets must be aligned with the environmental or social characteristics promoted by the fund or its sustainable investment objective. In addition, funds must apply exclusion criteria based on the type of term used. These exclusions are drawn from the EU’s Paris-Aligned Benchmark (PAB) and Climate Transition Benchmark (CTB) frameworks and are designed to eliminate exposure to controversial sectors, including fossil fuels, tobacco, and weapons.

Importantly, ESMA distinguishes between different categories of ESG-related terms and sets specific expectations for each. 

Distinctions by ESG Term Category

To ensure clarity and consistency, ESMA has established specific guidelines for each category of ESG-related terms used in fund names. These distinctions help fund managers understand the precise requirements they must meet depending on the terminology they use, whether it relates to environmental, social, governance, impact, or sustainability characteristics.

Funds with Environmental-Related Terms in their names 

Terms related to environmental aspects include, but are not limited to, “green,” “climate,” or “ESG.” 

These funds are expected to maintain a minimum of 80% allocation to investments aligned with the stated environmental or social characteristics or sustainable investment objectives. They must also apply PAB exclusions, which cover activities such as coal mining, oil and gas exploration, and certain high-emissions electricity generation. The ultimate aim is to ensure that any environmental label clearly reflects a strong commitment to reducing or avoiding core sources of carbon emissions and other environmentally harmful practices.

Funds with Transition-, Social- and Governance-Related Terms in their names

Terms related to transition include, but are not limited to, “net zero,” “decarbonisation,” and “transformation.” 

Terms related to social include, but are not limited to: “social,” “equality,” or any wording that might lead investors to believe social characteristics are being promoted. Governance-related terms include but are not limited to: “governance,” “controversies,” and similar descriptors. 

For funds using these terms, the guidelines require maintaining at least 80% alignment and applying CTB exclusions. There are additional requirements for funds that use transition-related terms, including the need to demonstrate a clear and measurable transition pathway. This could involve setting science-based targets, adopting decarbonisation strategies, or tracking progress through relevant KPIs.

Funds with Impact-Related Terms in their names

Terms related to impact include but are not limited to: “impacting” or “impactful”.

These funds must be able to demonstrate intentionality and measurable positive environmental or social outcomes. This involves articulating a credible impact strategy, establishing metrics for evaluation, and providing transparency on results. These obligations come in addition to meeting the 80% threshold and applying PAB exclusions.

Funds with Sustainability-Related Terms in their names

Terms related to sustainability include but are not limited to: “sustainable,” “sustainability,” or “sustainably”.

These funds must likewise meet the 80% threshold and follow PAB exclusions. They are also expected to “invest meaningfully” in sustainable investments, in line with the definition outlined in SFDR Article 2(17). This implies investments that contribute positively to environmental or social objectives, do not significantly harm other areas of sustainability, and observe robust governance practices. By requiring stricter alignment and evidence of ongoing sustainability contributions, ESMA ensures that the term “sustainable” carries substantive commitments and measurable outcome

National Regulators’ Adoption of the Guidelines

Although ESMA’s guidelines are not automatically binding, they set a strong standard that national regulators are expected to follow or explain. Several authorities — among them Germany, France, and Spain — have already confirmed full adoption. In Germany, BaFin has officially announced in October 2024 that it will fully apply ESMA’s guidelines on fund names, reinforcing the regulator’s commitment to tackling greenwashing and enhancing market transparency. Similarly, Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF) has integrated the guidelines into its regulatory framework through Circular CSSF 24/863, reaffirming Luxembourg’s efforts to ensure that ESG or sustainability-related terms in fund names accurately reflect a fund’s characteristics and objectives.

Other national regulators have issued or are in the process of issuing statements confirming their adherence to the guidelines, while a few have yet to clarify their positions publicly. Despite these variations, the overarching direction across Europe is toward greater consistency and transparency in ESG fund naming, providing investors with a clearer understanding of what they can expect from products labeled as environmentally or socially focused.

What’s next for fund managers?

Fund managers now face the task of reviewing their product offerings to determine whether any fund names fall under the scope of the ESMA guidelines. This review process involves assessing the ESG alignment of fund holdings, identifying potential breaches of exclusion criteria, and deciding whether to adjust investment strategies or rename funds altogether. Where changes are made, associated disclosures—including prospectuses, SFDR documentation, and marketing materials—must be updated to ensure consistency throughout all investor-facing information.

While ESMA’s guidelines are formally non-binding, the vast majority of EU national regulators have now adopted them and begun enforcing compliance. Authorities such as BaFin in Germany have fully applied the guidelines since late 2024, and others have followed suit. Funds that fail to align with the rules risk regulatory scrutiny, reputational damage, and even legal consequences—particularly in jurisdictions where misleading fund names may breach consumer protection or competition laws. In practice, courts may use ESMA’s guidelines as a benchmark for determining whether a fund name could mislead investors. With the transition period for existing funds ending in May 2025, time is running out for asset managers that have yet to act.