The EU has been at the forefront of green bond issuance, demonstrating strong growth and a commitment to sustainable finance. However, ESMA’s new fund naming guidelines could create misalignment with other sustainable finance regulations, such as the EU Green Bond Standard, and hinder the growth of the corporate green bond sector.
Regulatory inconsistency: Current interpretations and clarifications of sustainable finance regulations dealing with the use of revenue instruments focus on the project being financed rather than the broader activities of the issuing company. For example, the EU Green Bond Standard (EU GBS) does not restrict issuer eligibility and specifically does not exclude companies based on the Paris Agreement Benchmark (PAB) criteria. However, the new fund naming convention excludes companies on this basis, regardless of their debt-financed projects. This means that bond funds that invest in green bonds may need to change their names if they do not restrict the eligibility of bond issuers. Alternatively, the fund could keep its name and divest from all bonds by issuers that generate a portion of their income from activities outside the scope of the PAB.
Market Impact: This restriction may limit the scope of investments in green bond funds, particularly corporate green bonds. Over the past five years, non-financial corporate issuers have accounted for 26-34% of annual issuance in the green bond market. The future success of the recently created EU green bond standard could also be undermined if large investors, such as funds, are prevented from investing in certain EU GBS-compliant bonds.
Impact on the energy transition: The largest issuers are utility companies, which play a key role in developing the infrastructure needed for a sustainable future. Excluding them from funds with sustainable or environmental terms in their names could raise capital costs, hinder major projects and delay the energy transition.
Enive Arakelijian, Regulatory Policy Advisor at EFAMA, commented: “A common interpretation is that sustainable finance regulation should focus on the projects being financed rather than the broader activities of the issuing company. This is particularly true when it comes to financing the energy transition. Importantly, this principle should also be applied to fund naming guidelines to ensure consistency across regulations. Our hope is that ESMA will understand this logic in relation to green bonds. If Europe wants to remain a world leader in sustainable finance, it will be vital that key concepts are understood and applied consistently.”
EFAMA Executive Director Tanguy van de Werwe added: “Green bonds enable financing and investment in projects that benefit the environment. The green bond market is growing significantly in the EU, accounting for almost half of global green bonds last year. If we want to remain competitive in this sector and encourage the financing of green projects in Europe and beyond, regulators and supervisors must ensure that rules such as fund naming guidelines do not hinder this market or make it difficult for end investors to do so. We need to ensure that regulations do not become unnecessarily complex.”
Source: EFAMA
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