Analysis: One taxonomy to rule them all? Investors face myriad green investing rules
19/10/2021 12:46
(Removes extraneous word in headline)
* 30+ definitions of green investments being developed
* Aim to steer cash into 'green' economic activities
* Investors see costs, hassle to navigate multiple schemes
By Huw Jones, Kate Abnett and Simon Jessop
LONDON, Oct 19 (Reuters) - After years of complaints that
there were no rules to determine what constitutes a
"sustainable" investment, investors now fret there will soon be
too many to navigate easily.
More than 30 taxonomies outlining what is and isn't a green
investment are being compiled by governments across Asia, Europe
and Latin America, each one reflecting national economic
idiosyncrasies that can jar with a global capital market which
has seen trillions pour into sustainable funds.
The European Union will introduce its green investment
taxonomy or common framework in January to help asset managers
inside the bloc and make green activities more visible and
attractive to investors. urn:newsml:reuters.com:*:nL4N2MD3RW
The rules also aim to stamp out "greenwashing", whereby
organisations overstate their environmental credentials.
Britain, which hosts the COP26 climate change conference
from Oct. 31, is set to finalise its own taxonomy next year but
has already signalled it will not just replicate what is drawn
up across the channel.
"We think there is probably quite a strong case for
diverging from the EU in a number of areas," said Ingrid Holmes,
executive director of the Green Finance Institute and chair of a
panel advising the UK government on its taxonomy.
SEEKING GLOBAL ALIGNMENT
While much of Britain's taxonomy will likely dovetail with
the EU's, it will also take inspiration from Chile, given the UK
stock market hosts a large number of miners, and from China's
agriculture-focused rulebook among others, Holmes said.
That may suit asset managers investing in UK assets and
offering their funds to UK investors. But for those with a
global approach, different taxonomies are a headache.
"We can live with coherence, but different jurisdictions
having a patchwork of different regulatory standards and
approaches adds costs, but it also increases investor
confusion," Chris Cummings, CEO of Britain's Investment
Association industry body, told a parliamentary hearing last
month.
The scale of money going into sustainable investments is now
"phenomenal" he said, but different rules are emerging when
asset managers crave global alignment in standards.
Different rules also make it hard for asset managers to reap
efficiencies through automated investment analysis, market
participants said.
"If I'm in Malaysia or I'm in Australia or I'm in Japan or
Canada and I've got a local reporting requirement with a
different framework and I'm trying to also trade internationally
then I've got duplicated costs," said Nathan Fabian of the PRI,
a United Nations-backed group which promotes responsible
investment.
Some major markets - including the United States - are not
expected to launch a nationwide taxonomy at all.
"The United States is unlikely to follow the EU approach of
developing a taxonomy embedded in regulation that defines what
activities are sustainable or not," said Eric Pan, chief
executive of U.S. fund industry body the Investment Company
Institute.
"We believe the (U.S. regulator) SEC should prioritise
mandating appropriate corporate disclosure of climate
information."
THE TAXONOMY TO BEAT ALL TAXONOMIES
Next month the International Platform on Sustainable
Finance, a body whose members include the EU, Britain, Canada
and Japan, will publish a report on the common features in
existing taxonomies, to try and create a shared reference for
how different countries are defining green investments.
The aim is to help investors compare jurisdictions, and
solidify principles that future taxonomies should follow.
A European Commission spokesperson said taxonomies should
share key features such as the aim of aligning with the Paris
climate accord.
"International cooperation is crucial to avoid substantial
differences that could result in higher administrative costs
and, in turn, hinder cross-border green capital flows," the
spokesperson said.
But with major economies set on their own proposals, and the
United States not planning to introduce any at all, some asset
managers are not hopeful for international coordination, even on
the basic design features of taxonomies.
"I think it's very, very unlikely we'll ever get to a
position where we can have an agreed set of guidelines and
definitions," said Joshua Kendall, head of responsible
investment at Insight Investment.
Michael Marshall, head of sustainable ownership at pension
scheme Railpen agreed: "I can't see policymakers in different
countries resisting the temptation to outdo their neighbours and
have the taxonomy to beat all taxonomies."
DUAL PURPOSE
The 27-country EU's taxonomy looks likely to be the most
comprehensive and strictest when it launches next year. Europe's
system will set specific criteria on emissions and other metrics
that each economic activity must meet to be classed as a green
investment - although it still has controversial gaps to fill,
such as on whether gas and nuclear energy will be included.
This could see funds keen to burnish their sustainable
credentials look to align themselves more closely to the EU's
framework.
Given their market size and early rollout, the EU and
China's systems are being used as a starting point for the
development of other national taxonomies.
For example, South Africa's taxonomy has largely followed
the EU approach, while Russia and Mongolia have drawn from the
Chinese blueprint - albeit with differences in the levels of
detail and coverage, according to a U.N. paper on sustainable
investment regulations published last month.
Market participants still see a limit to possible global
coordination, since countries are designing taxonomies to help
meet national climate targets that vary from state to state.
The EU plans a 55% reduction in its net greenhouse gas
emissions by 2030, from 1990 levels. China's target is for its
annual emissions to stop growing by that date.
"Taxonomies are serving a dual purpose of defining local
investment needs, which may vary from country to country, for a
financial market that is global, and there is just an inherent
tension there that we will need to reconcile," Holmes said.
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FoSDA Taxonomy Graphic https://tmsnrt.rs/3ANwZx6
EXPLAINER-What is the EU's sustainable finance taxonomy?
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(Reporting by Huw Jones, Simon Jessop and Kate Abnett in
Brussels; Editing by Emelia Sithole-Matarise)
((huw.jones@thomsonreuters.com; +44 207 542 3326; Reuters
Messaging: huw.jones.thomsonreuters.com@reuters.net))