Green bond funds in the European Union will be allowed to continue investing in bonds issued by major polluters, including energy and power companies, after the region’s securities watchdog introduced allowances in its updated fund naming guidelines.
The European Securities and Markets Authority (ESMA) clarified that fund managers can hold green or other use-of-proceeds bonds that meet specific sustainability exclusion criteria without needing to rename their funds or divest assets. The decision comes after industry backlash to rules announced in October, which investors warned could hinder utilities and power companies from raising capital for decarbonisation efforts, particularly through green bonds.
ESMA’s new guidelines, which took effect for new funds in November, dictate how funds using terms like “green,” “environmental,” or “impact” can market themselves as sustainable. Under these rules, funds are prohibited from investing in oil, coal, and companies that derive more than 50% of their revenue from natural gas, as well as the most polluting power producers. Fund managers have already begun renaming funds or selling assets that breach the criteria.
However, ESMA has clarified that green bonds issued under the EU Green Bond Standard—scheduled to launch on December 21—are exempt from the fund naming rules. In addition, a new “look-through” provision allows investors to hold green or other use-of-proceeds bonds issued to finance renewable or environmental projects by companies in carbon-intensive sectors, even if those companies fail to meet the broader exclusion criteria. This exemption does not apply to firms that violate UN Global Compact principles or OECD guidelines for multinational enterprises.
Agnes Gourc, head of sustainable capital markets at BNP Paribas, welcomed the clarification, saying it resolves major uncertainty at a crucial time for bond issuers. “In Q1, we would have seen some issuers hold back on green bond issuance until they had more clarity,” she said. “The timing is good.”
Energy and power companies play a significant role in the green bond market, accounting for around a fifth of global green bond issuance. By September this year, they had issued over $70 billion in green debt, according to data from LSEG.
The update provides flexibility for funds investing in decarbonisation projects while maintaining stricter guidelines for unsustainable practices, striking a balance between supporting green finance and ensuring accountability in the sustainable investment space.
