The European Union’s securities regulator is reviewing potential adjustments or clarifications to forthcoming rules on sustainable investment fund naming, after concerns from investors that these could limit access to capital for companies seeking to decarbonise. The European Securities and Markets Authority (ESMA) will implement the new rules on 21 November, aiming to combat greenwashing by establishing criteria for funds to label themselves as ‘sustainable’ or ‘green.’
The rules prohibit funds using terms like ‘green,’ ‘environmental,’ or ‘impact’ from investing in industries such as oil, gas, coal, and highly polluting electricity firms. Fund managers will be required to either rename their funds or divest assets that don’t comply with the criteria. According to research from Clarity AI, about 55% of funds affected by these rules have investments that violate the standards.
While some industry groups and fund managers argue that the rules could impede sustainable investment by preventing high-emission sectors from securing financing for renewable energy projects, others caution that revisions may erode trust among issuers and investors.
“Our main concern is less about individual companies or funds and more about the message it sends to green bond issuers and investors that regulators might destabilize the market with new regulations,” said Agnes Gourc, head of sustainable capital markets at BNP Paribas. She also noted that the ESMA guidelines’ focus on companies contrasts with other EU regulations, like the EU Green Bond Standard and the Sustainable Finance Disclosure Regulation (SFDR), which evaluate sustainability based on specific projects.
An ESMA spokesperson declined to address concerns about the potential impact on the green bond market but acknowledged that ESMA is reviewing practical issues related to fund naming and may offer further guidance.
Supporters of green bonds argue that they encourage investment in eco-friendly projects, while critics say they fall short of driving deeper changes in polluting business models. Energy and power companies account for 20% of the global green bond market, issuing over $70 billion worth of bonds this year, according to LSEG data. Excluding these companies from sustainable funds could increase their capital costs, delay essential projects, and slow the energy transition, the European Fund and Asset Management Association warned this week.
