New guidelines for naming investment funds could limit the investable universe for green bond funds, in particular corporate green bonds that are important for the energy transition, according to EFAMA.
The European asset management association also said the guidelines could undermine the future success of the EU Green Bond Standard (GBS), if major investors like funds were disincentivised from investing in certain EU GBS-compliant bonds.
In a statement today, it said that for use-of-proceed instruments such as green bonds, “current interpretations and clarifications in sustainable finance regulation” focus on the project that is being financed, not the broader activities of the issuing company.
The fund naming guidelines drafted by ESMA, however, excluded companies based on standards for EU Paris-aligned benchmarks (PAB), regardless of the project they are financing with the bond, EFAMA said.
According to EFAMA, a bond fund investing in green bonds might have to drop sustainable or environmental terms from its name, or keep its name but divest from bonds by issuers who generate parts of their revenues from PAB-excluded activities.
The restriction could slow down the energy transition, EFAMA said, as utility companies, which play a vital role in building the infrastructure needed for a more sustainable economy, are the largest corporate issuers of green bonds.
In the final ESMA guidelines, all funds using words such as ‘environmental’, ‘impact’ or ‘sustainability’ should exclude assets that fall foul of screening criteria laid out in the PAB regulation, which includes a ban on the most polluting electricity and oil and gas companies.
‘Transition’-labelled funds can, however, use the criteria of the Climate Transition Benchmark (CTB), which is a lighter version of the PAB, without energy exclusions.
Anyve Arakelijan, regulatory policy adviser at EFAMA, said: “In sustainable finance regulation, the general interpretation has been that the project being financed should be the focus, not the wider activities of the issuing company.
“To ensure consistency across regulations, this principle should also be applied within the fund naming guidelines. Our hope is that ESMA will see the logic of this when it comes to green bonds. If Europe wants to remain a world leader in sustainable finance, consistent understanding and application of key concepts will be crucial.”
Earlier this year Morningstar reported that 30 funds disclosing under Articles 8 and 9 of the EU’s sustainable finance disclosure regulation (SFDR) had removed ESG-related terms from their names since the beginning of the year.
Asked for a response to EFAMA’s critique, a spokesperson for ESMA said the watchdog “is considering certain specific issues related to the practical application of the guidelines on funds’ names using ESG- or sustainability-related terms, including whether there is a need to provide further guidance”.
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