EU watchdog to clarify ESG fund naming rules after backlash
New ESMA sustainable fund naming rules to apply Nov. 21
Investors say exclusions will limit energy transition finance
Regulator says it is considering further guidance
Unclear if exclusions will be reversed
By Virginia Furness
LONDON, Oct 11 (Reuters) -The European Union's securities watchdog is considering changes or clarification to incoming rules on the naming of sustainable investment funds, after investors warned they could make it harder for polluters to access cash they want to decarbonise.
The European Securities and Markets Authority (ESMA)'s new rules, which will apply from Nov. 21, set out how funds can label themselves as 'sustainable' or 'green', the latest regulatory effort to root out greenwashing - exaggerated claims about environmental credentials.
Under the rules, funds using words including 'green', 'environmental' or 'impact' in their names will be barred from investing in oil and gas, coal and the most polluting electricity companies.
Fund managers must change their fund names or sell assets that breach the criteria. Research firm Clarity AI's analysis shows that around 55% of in-scope funds have at least one investment in breach.
Some industry trade bodies and fund managers say the new rules could restrict sustainable investment by preventing companies in high-emitting sectors from financing ringfenced projects like renewable energy. Others argue that changes could undermine confidence among issuers and investors more broadly.
"Our main concern is not so much the impact on a given company or fund, it is the signalling to green bond issuers and investors that regulators could disrupt the market with new rules," said Agnes Gourc, BNP Paribas' head of sustainable capital markets.
She also said the ESMA's guidelines' focus on companies contradicts other EU rules like the EU Green Bond Standard or the Sustainable Finance Disclosure Regulation (SFDR), which allow investors to assess the sustainability credentials of a bond on a purely project basis.
An ESMA spokesperson declined to comment directly on criticism the rules could disrupt the green bond market but said: "ESMA is considering certain specific issues related to the practical application of the guidelines on funds' names using ESG (environmental, social and governance)- or sustainability-related terms, including whether there is a need to provide further guidance."
An ESMA official told trade publication Responsible Investor this week it was looking at how the rules applied to green bonds specifically. It was unclear whether ESMA was considering dropping the exclusions and the spokesperson declined further comment.
While supporters of green bonds say they incentivise businesses and governments to invest in greener schemes, critics say they do little to encourage fundamental change to polluting business models.
Energy and power companies represent a fifth of the global green bond market and have issued more than $70 billion-worth this year, according to LSEG data.
Excluding them from funds calling themselves sustainable could raise their cost of capital, hinder key projects and slow the energy transition, the European Fund and Asset Management Association warned this week.
Reporting by Virginia Furness
Editing by Tommy Reggiori Wilkes and Philippa Fletcher
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