ESMA Guidelines on funds’ names using ESG or sustainability-related terms – What are their implications for Greenwashing liability and litigation risks in Germany?

Over the last years, the combination of regulatory reporting requirements and an increasing number of cases that further define civil liability for greenwashing have resulted in an increasingly complex situation for financial institutions. 

In the midst of these developments, the European Securities and Markets Authority (ESMA) published its Guidelines on funds’ names using ESG or sustainability-related terms (Guidelines) which apply from 21 November 2024 onwards.  

This blogpost provides an overview of the scope and content of the Guidelines (see I.), outlines the Guidelines’ potential impact on civil liability and litigation risks for financial institutions in Germany (see II.) and identifies potential risk mitigation measures (see III.).

I. The ESMA Guidelines on funds’ names 

After a two-year long consultation process, the ESMA published its Guidelines in May 2024. The Guidelines are based on the AIFM (Alternative Investment Fund Managers) and the UCITS (Undertakings for Collective Investment in Transferable Securities) Directives, which aim to ensure fairness and prevent misleading practices by requiring transparency, clear disclosure of risks, and accurate marketing to protect investors. The Guidelines apply to UCITS management companies and Alternative Investment Fund Managers, including internally managed Alternative Investment Funds, EuVECA, EuSEF and ELTIF and MMFs managers as well as the competent authorities. The framework will apply as of 21 November 2024 for any new funds created on or after the application date and as of 21 May 2025 for funds existing before the application date.

In its final report on the Guidelines ESMA noted that competitive market pressures create incentives for asset managers to include terminology in their funds’ names that is designed to attract investor assets – such as “green”, “environmental”, “climate” “sustainable”, “transformation”, “net-zero”, “social”, “transition” or “impact” – and that misleading sustainability disclosures may give rise to a risk of greenwashing. ESMA also highlighted in its final report that the names of funds are an important marketing tool for funds and can have a significant impact on investment decisions. Against this background, the purpose of the Guidelines is to specify the circumstances in which funds’ names using ESG or sustainability related terms are unfair, unclear or misleading.

For this purpose, the Guidelines group funds that use relevant terminology into the following categories: 

1. Funds using transition-, social- and governance related terms (e.g. “transition”, “improve”, “evolution”, “transformation”, “net-zero”, “social”, “equality” or “governance”); 
2. Funds using environmental- or impact-related terms and (e.g. “green”, “environmental”, “climate”, “ESG” or “impact”); 
3. Funds using sustainability-related terms (e.g. “sustainable” or “sustainably”).

For such funds, the following recommendations are adopted:

1. Threshold of 80% linked to the proportion of investments used to meet environmental or social characteristics or sustainable investment objectives;
2. Exclude investments in companies listed in the section on exclusions for EU Paris-aligned benchmarks pursuant to Art. 12 CDR (EU) 2020/1818 (e.g. involvement in activities related to controversial weapons, tobacco production, violation of the OECD Guidelines for Multinational Enterprises, exploration and distribution of hard coal / lignite / oil / gas; the specific investments to be excluded vary by category);
3. Funds using sustainability-related terms should commit to invest meaningfully in sustainable investments as defined in Article 2(17) Regulation EU 2019/2088 on sustainability-related disclosures in the financial services sector (e.g. investments in economic activities that contribute to an environmental or social objective); 
4. Funds using transition-related or impact-related terms should ensure that investments used to meet the threshold are on a clear and measurable path to social or environmental transition or are made with the objective of generating a positive and measurable social or environmental impact alongside a financial return.

II. What are the implications of the Guidelines on greenwashing liability and litigation risks in Germany?

The Guidelines call on the competent, in particular national, authorities, to consider the recommendations throughout the life of a fund and, if required, initiate further investigation and a supervisory dialogue with the fund manager. According to the Guidelines, this could be indicated, for example, if deviations in the level of the quantitative threshold are not only temporary or if the use of transition-, ESG-, impact- or sustainability-related terms would result in investors receiving unfair or unclear information or in a failure of the manager to act honestly or fairly. We, therefore, also expect the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) to take the Guidelines into account in its supervisory activities. 

The Guidelines may have an impact on civil liability and litigation risks in Germany. Although the Guidelines themselves are only recommendations and do not contain any provisions on civil liability for non-compliance, national courts might use the Guidelines as a benchmark when deciding on questions of civil liability under German law. 

The 80% threshold, linked to the proportion of investments used to meet environmental or sustainable investment objectives, could be argued by claimants as a benchmark against which to assess compliance, and – potentially – civil liability in this regard. In the context of prospectus liability, in particular under the German Investment Code (Kapitalanlagegesetzbuch, KAGB), claimants could argue that courts should refer to the Guidelines when assessing whether the naming of funds is misleading. The Guidelines might also be taken into account by courts when considering injunctive relief or a claim for damages under the German Act against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb, UWG). Under the UWG, anyone who uses misleading business practices that are likely to cause a consumer or other market participant to take a transactional decision that he or she would not have taken otherwise is acting unfairly and may be liable for damages. The application of these UWG provisions in the context of ESG has already been the subject of litigation in Germany (Judgment of the Federal Court of Justice, dated 27 June 2024, Ref. I ZR 98/23). 

If claimants are able to prove causation, they might further argue that a claim for damages in connection with an investment leads to the rescission of the contract, i.e. the consequence of a successful claim in such cases would be that the investor is entitled to recover his invested capital, minus any remaining profits.

Claimants could seek to assert such liability claims in the form of individual actions before German courts or under a collective action regime, such as a Redress Action (Abhilfeklage) or a proceeding pursuant to the Capital Markets Model Case Act (Kapitalanleger-Musterverfahrensgesetz).

III. What should fund managers and financial institutions do now?

In order to help reduce liability and litigation risks, the Guidelines should be carefully considered and duly taken into account, despite their non-binding nature. While the Guidelines currently only apply to newly launched funds, their scope of application will be extended to existing funds from 21 May 2025. From that date, the liability risks outlined above will apply to all funds falling within the scope of the Guidelines.

We encourage consideration of the following measures:

• Before launching new funds, fund managers and financial institutions should take the Guidelines into account with immediate effect. 
• Fund managers should not delay in bringing existing funds into line with the Guidelines and should begin to critically review the names of existing funds and their compliance with the Guidelines.
• In order to comply with the Guidelines, it will also be essential to monitor the reporting of companies that are included in the relevant funds on a continuous basis. If, as a result of such monitoring, there is evidence that the requirements of the Guidelines are no longer being met, the fund should be restructured or its name changed accordingly.
• All steps taken to comply with the Guidelines should be documented, including the steps taken to verify and monitor the compliance with the Guidelines. 

By taking such steps, fund managers may not only better mitigate liability and litigation risks, but also position themselves for long-term compliance in an ever-evolving regulatory environment.