ICMA has given feedback on the application of Paris-aligned Benchmarks (PAB) exclusions to sustainable bond investments under the recent ESMA Guidelines.
On behalf of ICMA and its constituents, especially by the Asset Management & Investors Council and the Executive Committee of the Principles, we wanted to provide feedback on the application of the PAB exclusions to green and sustainable bond investments under the recently finalised ESMA Guidelines on funds’ names using ESG or sustainability-related terms.
Under these Guidelines, funds with “sustainable”, “ESG”, environmental or impact-related names, other than those that are social or transition-related, should follow the exclusions of the PAB. This implies that many “green bond funds” or “sustainable bond funds” would either need to divest from green use-of-proceeds (UoP) bonds1 of utilities and other companies with legacy fossil fuel revenues or incorporate the term “transition” into their fund names if, as required by the Guidelines, the fund manager can demonstrate that “the investments are on a clear and measurable path to social or environmental transition”.
For green bonds, such an outcome would be inconsistent with the approach of various EU regulations that assess the sustainability of such instruments at UoP level. It would also cause significant disruption in this market and in sustainable bond funds since utilities are large issuers of green and sustainable bonds. Moreover, various EU regulations such as the Corporate Sustainability Due Diligence (CSDD) Directive and Corporate Sustainability Reporting Directive (CSRD), as well as the guidance of the Principles already address issuer-level transition concerns on top of the greenness/sustainability of UoP. We therefore believe an exception to the application of PAB exclusions at issuer level would be both consistent and appropriate when investing in green bonds.
Secondly, several of our members have also recommended that ESMA consider providing an exception for sustainability-linked bonds (SLBs) which are fully aligned with the Sustainability-Linked Bond Principles and incorporate ambitious targets2 and material KPIs, which can be drawn from the Illustrative KPIs Registry. These instruments are complementary to UoP instruments and are designed to incentivise issuers towards sustainability. Investment flexibility in all types of sustainable bonds is essential for advancing environmental objectives and ensuring a comprehensive approach to sustainable finance...
more at ICMA
© ICMA
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article