AMF ESG rules. France Protectionist Approach on ESG in Fund Names 

In the recent past there has been a rush at both sides of the Atlantic to regulate the use of ESG terms in fund names. Without having rules on sustainability and related disclosures in place yet, the US seems to have recently spearheaded the movement. The first adopter of sustainability disclosures rules comes second in this endeavour. ESMA proposed guidelines on fund names using ESG or sustainability related terms only by the end of 2022, way after SFDR was firstly introduced.  

What did Americans see in the use of ESG terms in fund names – that European didn’t – to want to rule it well in advance of having their own regulatory infrastructure for the sustainability disclosures? The paradigm shift to sustainable investing is a big marketing opportunity. Most importantly, bold claims of sustainable investing might not match the real substance of underlying funds’ investments and strategies. Greenwashing risk, in other words.  

It wouldn’t be entirely accurate though to say that Europeans did not see this coming. In an early 2022 public speech, ESMA already lamented the misuse made by industry of the disclosure regulation on sustainability as a product label regime. By the end of that year, we have the first proposal from ESMA on the use of ESG terms in fund names and then a revised one by the end of 2023. 

Creating a level playing field in Europe  

Despite the initial lukewarm reception – and the fundamental criticism on the underlying approach – it is fair to say now that European rules on the use of ESG terms in fund names will be out soon. Amongst the multiple drivers, in addition to curbing greenwashing as a Union policy priority, we also see a necessity to ensure common standards in Europe. And creating a level playing field in Europe on the use of ESG terms in fund names is a pressing reality. Other European member states are already ahead in this space with their own rules, opening possibilities of uneven treatment and regulatory arbitrage.  

One example of local rules on ESG in fund names, albeit not discussed much in the industry, is in Germany. Here, in 2021 an initial proposal was rolled out to impose requirements on the investment conditions of retail investment funds adopting a reference to sustainability in their name. The draft German guidelines introduced a main distinction between sustainable investment funds because of underlying investment assets and overall investment strategy. For what concerned the first category, also here we see a quantitative approach expressed as a ratio of 75% of the underlying investments in sustainable assets. That is a quantitative approach similar to the one adopted by the US and European rules. The proposal to introduce German rules lost steam and has not materialised into a local directive yet.      

The most notable example of local rules on the use of ESG in fund names remains the French one. Amongst the most protectionist member states in Europe, via a position document issued in 2020 France was the first European country to front run the introduction of rules on the consideration and use of so-called non-financial approaches in marketing communications and other information provided by investment funds to investors. The position of the French authorities on this issue is very articulated and has implications also on the marketing of foreign funds in the French market.   

AMF ESG Rules and Position Recommendation 2020-03 

As part of its supervisory activity, the French regulator AMF often uses position recommendations. Based on authentic interpretations of certain laws or rules, they represent official suggestions and best practice on specific issues. Whilst introduced in 2020, the position recommendation on the information to be provided by funds incorporating non-financial approaches – in jargon AMF ESG rules – has been updated over time to reflect the evolution of the AMF in approaching this issue.   

The aim of the AMF ESG rules is first and foremost to protect its developing internal sustainable finance market from the risk of greenwashing. This is where the rules want to strike a fine balance between sustaining the growth of this market and create trust in its participants at the same time. As part of this approach, emphasis is posed necessarily on the information provided by product manufacturers to investors. Where the design of investment funds strategies considers non-financial characteristics, information provided to investors shall ensure that reference made to such characteristics matches proportionately the actual consideration and deployment thereof within the specific investment strategy.   

To the contrary of the SEC and ESMA rules, which concentrate exclusively on the use of ESG terms in fund names, the AMF ESG rules take a more holistic approach to the issue of greenwashing in investment fund communications. To this end, the AMF ESG rules refer to all product related communications. A more encompassing approach, including fund names but not limited to them and that allows to include references to non-financial elements of an investment strategy made in retail friendly disclosure documentation – like KIIDs and KIDs – as well as in the prospectus and other marketing materials. 

Different Levels of Product Communication 

As mentioned, the AMF ESG rules represent an official interpretation of general rules, part of the local regulatory infrastructure and already applicable to UCITS and AIF distributors, including foreign UCITS marketed in France. More namely, the aim of the AMF ESG rules is to the define a principle of proportionality that will ensure a clear, accurate and non-misleading communication about non-financial aspects pertaining investment funds strategies. An official adaption of the existing rules on marketing communications when non-financial considerations are involved.  

The approach adopted by the AMF is to differentiate product communications in three different levels, depending on the relevance assigned to the consideration of non-financial and ESG elements or characteristics. Non-financial elements can be a key or central aspect of a communication or else a limited aspect. Each of these two levels has a minimum standard for the investment strategy and portfolio composition associated to it. A third level of communication is represented by the presentation of non-financial elements made only in the prospectus of a fund, in a manner that is proportionate. This level of communication will not trigger any requirement for associated investment standard.  

Non-financial elements are always considered central or key to a communication when they are presented in the name of a fund. When presented in retail disclosures, like KIDs and KIIDs, as well as marketing materials, these can be considered key or limited aspects of the communication depending on whether their presentation is made in a concise manner or not. For what concerns the retail specific disclosures, like KIIDs and KIDs, the presentation will be concise – making the related communication limited as opposed to key – when the non-financial aspects are presented in the section Other Information and Other Relevant Information (depending on whether it is a UCITS KIID or a PRIIPs KID). For what concerns the marketing documentation instead, the presentation of non-financial aspects will be considered concise when it is secondary to the presentation of the features of the product, in terms of breadth and positioning. Also, the communication has to be neutral (i.e. without special emphasis or visuals) and limited to less than 10% of the volume of characters used for the presentation of the fund investment strategy. 

Gold-plating and SRI Label 

To understand the approach adopted with the AMF ESG rules, it helps to draw a comparison with the US and European rules. It makes sense in this respect to restrict the analysis of the AMF ESG rules to the requirements imposed in case non-financial elements are a key aspect of the communication. This is always the case when a fund uses ESG terms in its name. Suffice to say that there are also less stringent requirements imposed in case non-financial considerations are a limited aspect of the communication.  

By and large both the US and European rules adopt merely a quantitative and threshold-based approach. The use of ESG terms in fund names is subject to meeting specific threshold of qualifying investments. The AMF ESG rules state that only investment funds that adopt a significantly binding approach in their ESG strategies can refer to non-financial characteristics as a key aspect of their communications. The concept of significantly binding is derived by reference to the French SRI label.  

The SRI label was introduced by the French Minister of the Economy and Finance in 2016. After a rigorous screening process, the SRI label is granted to investment funds that abide to certain specific requirements, including on the composition and operation of their portfolios relative to ESG factors. SRI labelled funds have typically more than 90% of their assets invested in ESG rated securities. SRI labelled funds are the ones that can measure the results of the implementation of ESG factors in their strategies. To ensure that ESG implementation can be measured, privileged investment approaches are selectivity and rating upgrade, with elimination of set percentages of least rated securities in comparison to a benchmark investable universe.    

The reference made to the SRI label in part also clarifies the aims of the AMF ESG rules. In addition to foster the development of its nascent internal market for sustainable finance, the aim is also to protect the credibility of its newly established SRI label. This gets clearer as we look at the measures imposed on foreign UCITS and retail ELTIFs marketed in the French market. 

Marketing Foreign UCITS and Retail ELTIFs in France  

The AMF ESG rules entered into force at a point in time when the use of ESG terms in fund names was not at all regulated. Even when European rules will be applicable and in force, the standard imposed on French retail funds that can use ESG terms in their names will be more articulated and onerous compared to the European standard. It will reflect the criteria of the French SRI label. It is a fact that retail funds from other European countries would find it extremely difficult to comply with all the requirements imposed on marketing communications by French applicable law. 

For the French market being traditionally closed to foreign non-European funds, the same cannot be said for European funds. Where retail funds from European countries indeed make of ESG a key aspect of their communications more freely and compete in the French market with French retail funds, the approach adopted by the French authorities is realistic and trenchant.  

Foreign European UCITS and retail ELTIFs, which makes use of ESG in fund names and other marketing communications are required to disclaim in a prominent manner that vis-à-vis the expectations of French authorities the reference made to ESG factors in its strategies is disproportionate.  

Conclusions 

The experience of European cross border distribution got us already used to practices of gold-plating. This is when local rules in certain member states introduce additional requirements to the ones existing at European level in a certain ecosystem. As the European market for sustainable finance gathers momentum we realise that it is not immune from gold-plating and that certain local markets in Europe will be more difficult to penetrate than others.