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New ESMA sustainable fund naming rules to apply Nov. 21

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Investors say exclusions will limit energy transition

finance

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Regulator says it is considering further guidance

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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.