Asset managers in Europe face new restrictions on what they can call an ESG fund.

An investment product with ESG — or equivalent terms — in its name will need to place at least 80% of its assets under management in something that’s related to environmental, social, or governance objectives, according to long-awaited guidelines by the European Securities and Markets Authority. 

Fund names are “often the first piece of fund information investors see,” and “can have a significant impact” on investment decisions, ESMA said in a statement on Tuesday. 

The new guidelines are intended “to specify the circumstances where the fund names using ESG or sustainability-related terms are unfair, unclear or misleading,” the watchdog said.

ESMA began work on its naming requirements in 2022 after a boom in ESG investing led to concerns that some product claims were misleading. A year earlier, the European Union had enforced its Sustainable Finance Disclosure Regulation, an investing rulebook under which some USD 13trn of assets are now registered. According to Bloomberg Intelligence, roughly 60% of those are currently listed as either promoting ESG or making it an outright objective.

The watchdog had initially planned to introduce a second requirement for funds using sustainability-related terms: to also hold at least 50% of assets defined as sustainable under SFDR. The proposal was withdrawn amid concerns that the regulation gives fund managers considerable leeway to define sustainable assets, making the threshold potentially meaningless.

“ESMA has, however, decided to introduce instead a commitment to invest meaningfully in sustainable investments for the use of any sustainability-related words in funds’ names,” it said.

SFDR is itself now under review, with the European Commission considering potentially significant changes after going over feedback received via a consultation process.

ESMA’s new guidelines will apply three months after their publication on its website in all official EU languages. Existing funds have six months to comply, while new funds must apply the rules immediately. Authorities in member states must incorporate the guidelines in their supervision of the market, or state why they don’t intend to comply.