As sustainable finance grows in popularity, fund managers are increasingly turning to terms like “impact” to describe their strategies. This term is heavily associated with sustainable practices, which is why its use comes with clear regulatory expectations.

The European Securities and Markets Authority (ESMA) has released guidelines on fund names to protect investors from greenwashing under the SFDR framework. These guidelines officially apply three months after their publication, which dates from August 21st, 2024. This three-month window gave fund managers time to prepare for the new rules. Therefore, from November 2024, new funds must comply with the guidelines if they wish to use one of the terms covered therein. However, already existing funds are given six more months to comply. From May 2025, firms must align their fund name and strategy with the new requirements.

What is an Impact Fund?

An impact fund is designed to generate both financial returns and positive social or environmental outcomes. These funds are part of the broader impact investing movement, which aims to address global challenges like climate change, poverty, and inequality by directing capital towards projects and companies that create tangible benefits for society and the environment.

Impact funds typically focus on investments made with the intention of generating measurable positive impact. However, impact does not have be their only goal; it is compatible with seeking financial return. For many impact funds, the environmental or social objectives are therefore just as primary goals as it is to make profits.

To the above EU definition, we must add the widely recognised criteria within international frameworks such as the Impact Management Project (IMP) classification or the Accelerating Impact report, including:

• ‍Additionality, that is, that the positive impact generated would not have happened without the fund’s investment.
• Intentionality. Under the IMP classification, there are three categories based on the motivation to generate positive impact:

A) Firms whose intention is based purely on compliance and avoiding primary regulatory or financial risks.
B) Firms who wish to create value, attract investors and consumers, and ensure long-term financial stability.
C) Firms who target one or more social issues and make investments directed at alleviating or solving them.

Under this classification, only funds under the C) category could be named impact funds.

EU Requirements for Impact Funds

If you’re considering labelling your fund an impact fund, here’s exactly what you need to do.

1. Minimum 80% Investment in ESG-Aligned Assets

Your fund must commit to investing at least 80% of its assets in companies that meet ESG characteristics or objectives. This threshold isn’t just a loose target, it must be a clear, binding part of your investment strategy. The aim is to ensure that your fund’s name genuinely reflects its intention.

Can an Article 8 fund under SFDR be called an impact fund?

The fact that the guidelines mention both “characteristics” and “objectives” suggests that Article 8 funds could be named impact funds. However, research shows that very few funds labeled as “impact funds” are classified as Article 8. Those that are, typically fall into one of two categories:

• They are in the process of transitioning to Article 9, or
• Their LPs apply even stricter frameworks to demonstrate impact.

It’s also important to note that SFDR classification is closely tied to the EU Taxonomy, which primarily addresses environmental objectives rather than social ones. As a result, social impact funds often find the EU standards misaligned with their investment strategies and are generally more hesitant to adopt them.

Moreover, the Principal Adverse Impact (PAI) framework is, as its name suggests, a set of indicators for measuring negative impact. Given that impact funds are usually focused on positive impacts, many of these firms question the SFDR’s adequacy to monitor their targets.

In our experience, impact funds pursue conformity with the SFDR merely for its labelling capacity and for compliance purposes, while they keep reporting under their own impact-focused frameworks simultaneously. ESMA even refers to such frameworks as a way to prove that the investment strategy of the fund is effectively aligned with the word "impact", that is, a measurable positive repercussion on society or the environment.

What’s even more interesting is the fact that impact funds often feel like they are unfairly competing against other Article 9 funds whose focus is sustainability rather than impact.

What is the difference between sustainable funds and impact funds?

For the sake of exhaustiveness, let’s distinguish between the three different (but related) strategies, other than impact investing:

• Socially responsible investing (SRI) refers to the integration of ethical considerations in the investment decision-making process. The goal is not to drive positive impact, but to avoid contributing to negative societal impact while seeking financial return, which remains the main priority.
• ESG investing relies on ESG data measurements and regular monitoring as a tool for assessing investment value. ESG considerations are at the heart of the investment strategy but usually from a financial materiality perspective.
• Sustainable investing focuses on solutions that drive improvements in preserving the environment, natural resources, human rights, and quality of life, among other goals.

"Impact" is therefore not the only term that ESMA tackles in the Guidelines. They further refer to:

• “Transition”-related terms, as well as “improve”, “progress”, “evolution”, “transformation”, “net-zero”, etc.
• “Environmental”-related terms, such as “green”, “environmental”, “climate”, "ESG", or "SRI".
• “Social”-related terms, such as “social”, “equality”, etc.
• “Governance”-related terms, and related words, like “controversies”.
• “Sustainability”-related terms.

Any form of the word "sustainability" bears the added requirement of assessing EU Taxonomy eligibility and alignment, and for a significant part of the portfolio to be Taxonomy-aligned. As for the other terms mentioned, the requirements are essentially the same as for impact funds, adapted to their particular meaning or implied conditions. For example, a "green" fund, must be at least an Article 8 SFDR product and have environmental considerations at the core of its investment strategy; a "transition" fund must lay down a clear and credible transition plan, as the word implies.

2. Use of Binding ESG Criteria

Your ESG strategy can’t be vague or aspirational. Instead, you need to define and apply binding investment criteria. These criteria must be:

• Clearly described in your disclosures.
• Consistently applied across the portfolio.
• Integrated into the investment decision-making process.

This is crucial for demonstrating that "impact" isn’t just part of your marketing, it’s central to how you manage your fund. Your targets must be clear and measurable, and you will likely face greater scrutiny when disclosing the historical evolution of ESG data within your portfolio.

3. Exclusion of Certain Sectors

Your fund must avoid investing in specific sectors identified in the Paris-Aligned Benchmark (PAB) exclusions, including:

• ‍Controversial weapons.
• The cultivation and production of tobacco.
• Companies found in violation of the United Nations Global Compact (UNGC) principles or the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises.
• The exploration, mining, extraction, distribution or refining of hard coal and lignite, oil fuels, or gaseous fuels.
• Electricity generation with a GHG intensity of more than 100 g CO2 e/kWh.

These exclusions are defined under Article 12(1) of the EU Climate Benchmark Regulation (Delegated Regulation 2020/1818) and are non-negotiable for funds using ESG-related names.

4. Consistency Across Disclosures

Lastly, your fund’s name and ESG claims must be consistent across all SFDR disclosures:

• Pre-contractual documents.
• Periodic reports.
• Website disclosures.

Everything you publish must reinforce the ESG characteristics implied by the term "impact".

Final Thoughts

Labelling your fund as an impact fund can help signal your commitment to driving positive environmental or social change, but it also comes with responsibility. Under ESMA’s guidance, this term isn’t just a marketing tool; it’s a regulatory commitment to transparency, accountability, and genuine ESG integration.

Before adopting the “impact” label, make sure your fund structure, investments, and disclosures are all aligned. Your credibility and compliance depends on it. If you would like to know more about how the EU addresses greenwashing under sustainability reporting standards, check this article.

If you would like us to discuss or answer further questions, do not hesitate to reach out!‍