The sustainable fund naming rules proposed by the European Securities and Markets Authority (ESMA) need to improve in their handling of labelled sustainable bonds, as it currently has an “unfortunate” impact on using these instruments for transition finance.
Speaking to Environmental Finance on the sidelines of the Sustainable Debt Americas event in New York last week, a fixed income portfolio manager at a major US investor said that generally the proposed ESMA rules around the use of certain terms in the names of sustainable funds is “helpful” for the market.
“[The ESMA rules] level the playing field,” he said. “Because, in some ways, we were historically having these higher standards putting us at potentially competitive disadvantage versus now if everyone is playing with the same broad set of restrictions.”
For sustainable bond investors, however, the ESMA rules in their current format pose a challenge to supporting transition issuers in self-declared ‘Article 9’ funds under the EU Sustainable Finance Disclosure Regulation (SFDR). Most dedicated sustainable bond funds are currently judged as ‘Article 9’ funds, which are supposed to demonstrate the most ambitious sustainability strategies and disclosure.
Within the fund naming guidance, ESMA recommended funds which use terms including ‘environmental’, ‘impact’ or ‘sustainability’ in their names must exclude companies that derive a certain amount of their revenue from fossil fuels – including coal, oil and gas – to use these labels for their fund. No distinction of exception is made for labelled sustainable use-of-proceeds bond investment, however – such as investment in green, social and sustainability bonds.
“ESMA’s naming rule still has some areas of improvement on things like green bonds,” he said. “We were talking to a utility earlier today that wants to make this concerted effort to transition and they are issuing a green bond. But, because they fail on some of these ESMA naming rules today, it is ineligible for an Article 9 or sustainable fund today – that is unfortunate.”
The investor – who manages an ‘Article 9’ fund – hopes that future editions of the rules will sharpen up the current “blunt” tool with regard to these labelled instruments – or else it could “stymie the transition market in these sustainable bond funds”.
Companies:European Securities and Markets Authority