The European financial regulator’s new fund naming guidelines have been criticised by the European asset management trade body Efama for create inconsistencies with other sustainable finance regulations, like the EU Green Bond Standard.
Efama claims the inconsistencies could hamper the growth of the corporate green bond sector.
“Clarification is urgently needed to enable rather than restrict EU sustainable investment,” Efama said in a statement.
“Current interpretations and clarifications in sustainable finance regulation dealing with use of proceeds instruments focus on the project being financed, not the broader activities of the issuing company.”
For instance, the EU Green Bond Standard (EU GBS) doesn’t restrict the eligibility of issuers and in particular does not exclude companies based on standards for Paris-aligned benchmarks (PAB). However, the new fund naming rules do exclude companies on this basis, regardless of the project they are financing with the bond.
This means that a bond fund investing in green bonds might have to change names if it does not restrict the eligibility of bond issuers. Alternatively, the said fund could keep its name and divest from all bonds by issuers who generate parts of their revenues from PAB-excluded activities.
Anyve Arakelijan, Regulatory Policy Advisor 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. This is particularly relevant when it comes to funding the energy transition.
“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.”
Tanguy van de Werve, Efama Director General, added: “Green bonds enable capital-raising and investment for projects with environmental benefits.
“The EU has seen significant growth of the green bond market and accounted for almost half the world’s green bonds last year. If the EU wants to remain competitive in this area and facilitate the financing of green projects in Europe and beyond, regulators and supervisors need to ensure rules like the fund naming guidelines don’t hinder this market or unnecessarily increase regulatory complexity for end-investors.”
