3 Key Impact Points:
- New ESG Rules Under Scrutiny: ESMA’s upcoming rules on sustainable fund labeling face criticism for potentially excluding high-emitting sectors from green finance.
- Industry Concerns: Investors warn that the restrictions could hinder polluters’ access to funds needed for decarbonization projects, such as renewable energy.
- Green Bond Impact: Excluding energy companies from sustainable fund labels could raise their capital costs and disrupt critical energy transition efforts.
The European Securities and Markets Authority (ESMA) is considering revising its forthcoming rules on the naming of sustainable investment funds following concerns from industry players. Set to take effect on November 21, the new regulations aim to clamp down on greenwashing by banning funds with names like “green,” “environmental,” or “impact” from investing in oil, gas, coal, and other high-polluting industries.
Industry Backlash
Research by Clarity AI indicates that around 55% of in-scope funds have investments that would breach the criteria, prompting concerns about the impact of the new rules. While the intent is to enhance transparency, many argue that excluding high-emitting sectors may stifle funding for key decarbonization projects.
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Some fund managers worry that the rules could disrupt sustainable investment strategies. Agnes Gourc, head of sustainable capital markets at BNP Paribas, said:
“Our main concern is the signalling to green bond issuers and investors that regulators could disrupt the market with new rules.”
Concerns About Green Bonds
Critics argue that the rules may inadvertently raise the cost of capital for energy and power companies, which account for a significant share of the global green bond market—issuing over $70 billion in bonds this year alone. Excluding them from sustainable funds could slow down the energy transition, warned the European Fund and Asset Management Association.
An ESMA spokesperson confirmed that the watchdog is reviewing the guidelines, particularly how they apply to green bonds, and is considering whether further clarification is needed. However, it remains unclear whether the exclusions will be modified before the rules take effect.
As the ESMA prepares to implement stricter guidelines on fund naming, the debate between supporting decarbonization and maintaining investor confidence in sustainable finance continues to evolve.
Related Article: PwC Survey Reveals Declining Board Focus on ESG Amid Ambiguity and Inconsistent Understanding
