The ESMA guidelines on funds’ names using ESG or sustainability-related terms apply even to funds that are closed to new investors.
The rules vary depending on which of these three categories your fund falls into:
Category 1 → Funds with these words or synonyms in the name → transition, net-zero, social, governance
Category 2 → Funds with these words or synonyms in the name → environmental, green, climate, impact, ESG
Category 3 → Funds with this word or synonyms in the name → sustainable
Requirements for each category
Funds in all categories must meet an 80% threshold, meaning at least 80% of holdings must be made to meet the fund’s environmental (E), social (S) or governance (G) objectives.
Funds in category 1 using “transition” in their name, or in category 2 using “impact” in their name, must ensure that investments within the 80% threshold are on a clear and measurable path to an environmental or social transition, or are made to generate a positive impact.
Funds in category 3 must also have more than 50% of holdings in sustainable investments, as defined in SFDR Article 2(17).
Funds in category 1 must apply the CTB exclusions, whereas funds in categories 2 and 3 must apply the PAB exclusions.
What are the CTB and PAB exclusions?
The Carbon Transitional Benchmark (CTB) and Paris Aligned Benchmark (PAB) exclusions are lists of prohibited corporate activities.
The CTB exclusions include controversial weapons, tobacco, and violations of UNGC and OECD principles.
The PAB exclusions are more extensive.
Managers must also disclose in their benchmark methodology any additional exclusion criteria they apply, based on climate-related or other ESG factors.
See the full breakdown of CTB and PAB exclusions below:
CTB Exclusions | PAB Exclusions |
Companies involved in any activities related to controversial weapons
| Companies involved in any activities related to controversial weapons
|
Companies involved in the cultivation and production of tobacco
| Companies involved in the cultivation and production of tobacco
|
Companies that benchmark administrators find in violation of the UNGC and OECD principles
| Companies that benchmark administrators find in violation of the UNGC and OECD principles
|
Companies that significantly harm one or more of the environmental objectives referred to in Article 9 of the 'EU taxonomy for sustainable activities' regulation
| Companies that derive 1 % or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite
|
| Companies that derive 10 % or more of their revenues from the exploration, extraction, distribution or refining of oil fuels
|
| Companies that derive 50 % or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels
|
| Companies that derive 50 % or more of their revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh
|
| Companies that significantly harm one or more of the environmental objectives referred to in Article 9 of the 'EU taxonomy for sustainable activities' regulation
|
What should you do as a fund manager?
The biggest challenges investors face is ensuring compliance with CTB & PAB exclusions and publish data (within the SFDR disclosures) which will prove compliance with these new exclusions and thresholds.
To ensure compliance and maintain credibility, fund managers should:
🅰️ Deploy a robust data and analytics platform
Use technology that allows you to see, in granular detail, which holdings meet or fail the CTB or PAB requirements. This will enable you to identify and, where necessary, divest non-aligned holdings.
🅱️ Review fund naming and branding
If your fund does not meet the required thresholds or exclusions, consider whether its name remains appropriate. Removing terms like “sustainable”, “environmental” or “green” may be necessary to avoid misleading investors.
Prioritise transparency, not cosmetic changes
Proceed carefully: renaming a fund can signal to investors and the market that the portfolio is less aligned with sustainability objectives than previously implied. For large or high-profile managers, this can carry reputational risk.
Ultimately, data transparency and proactive adjustment will protect both regulatory compliance and investor trust.
Aligning your portfolio now will position you strongly as scrutiny around ESG-labelled funds continues to increase.
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