Guidelines on the use of ESG- and sustainability-related terms in the names of EU-domiciled funds to combat greenwashing are set to exclude several higher-emitting entities currently held in Article 8 and 9 funds. The rules were unveiled by the European Securities and Markets Authority (ESMA) in May for funds that have been categorised under the Sustainable Finance Disclosure Regulation (SFDR). Sustainable Fitch’s portfolio analysis indicates that 11% of nearly 800 entities fall under ESMA’s safeguard exclusions – this especially impacts sectors like electricity generation and oil and gas. These entities account for US$154 billion (9%) of the total labelled debt issued by corporates and financial institutions across EMEA and North America. Many of the entities demonstrate strong compliance with other exclusion criteria, such as no involvement or investment in controversial weapons and tobacco production, although some have limited exposure to hard coal and lignite sectors (0.25% of entities). “Entities deriving significant revenue from oil fuels (1.01%) and gaseous fuels (2.4%) indicate areas where compliance with ESMA’s guidelines may require strategic fund adjustments,” Sustainable Fitch said. North America has the highest number of entities falling under ESMA exclusions, reflecting a bigger sustainability compliance challenge. As such, there is concern that compliance with the guidelines may restrict investment options, particularly for higher-emitting sectors through the labelled bond market.
