Investors challenge EU's sustainability approach

A range of investors and other financial market participants have poured cold water on the EU’s proposals to establish a standard classification system for sustainable investments.

The Securities and Markets Stakeholder Group (SMSG), which operates under the auspices of European Securities and Markets Authority (ESMA), said it has reservations about the EU’s Taxonomy Regulation for sustainable investments, which entered into force earlier this year.

The SMSG said in a new report that more needs to be done on the taxonomy, in particular on data and sustainability indicators in relation to adverse impacts to the climate and environment. It also suggests that the changes are being introduced too quickly, which will make it difficult to fine-tune them at a later stage.

It criticised the apparent "Big Bang" approach being taken by those driving the initiative, which would inevitably mean many items would need undoing later.

Instead the SMSG suggests a "phased approach with regard to the draft regulatory technical standards". It said this would be "particularly relevant for the proposed set of mandatory reference indicators to describe adverse impact".

The SMSG facilitates consultation between the ESMA and its key financial market stakeholders from around the EU. It provides ESMA with opinions and advice on its policy work and must be consulted on technical standards and guidelines and recommendations, however, its recommendations are not binding.

In line with this criticism, several large European asset managers voiced their reservations.

In its submission, M&G said the ambition to "establish a set of indicators that would immediately promote the exchange of data between investees and investors, data, which is acknowledged in many cases, as not being readily available today" was laudable, M&G believed it could not be accomplished in the timeframe given and it "should be moderated, at least in the short term".

The UK-based investor noted that the European Supervisory Authorities acknowledged the core issue of data "and we believe it is one which is not insurmountable. In fact, it must be overcome to achieve the objectives of the SFDR and make sustainability-related information available."

However, it added: "An approach requiring immediate disclosure of 32 mandatory indicators, with a further 2 from the “optional” lists, is not, in our view, a proportionate starting point." 

Elsewhere, Standard Life Aberdeen went further.

The Scottish asset manager said: "The objective by the regulator to achieve comparability of financial market participants in terms of their adverse impact at entity level is not realistic at this point in time given in particular the lack of (standardised) ESG data.

"Even if indicators are non-material to holdings, asset managers – in line with the proposed approach - will have to dedicate considerable time and resource to obtain relevant data and make assessments rather than focussing on identifying, assessing and addressing the actual adverse impacts of their holdings," it concluded.

Commenting on the feedback from investors, Minerva CEO Sarah Wilson agreed that good investing decisions need to be based on sound data.

"However, simply blaming data vendors for short-comings misses the point – unless or until annual reports make consistent and comparable disclosures based on open standards, we all face the same problem. Data quality is a sorely neglected and underinvested asset across the investment chain. Steps are being taken to address the proliferation of frameworks and standards; we are hopeful that TCFD’s leadership on this will move us all in the right direction."

What is the EU Taxonomy Regulation?

The European Union Taxonomy Regulation entered into force on 12 July 2020 and is designed to create a benchmark for green investments.

It is part of the European Commission’s broader action plan on sustainable finance, which it adopted in March 2018.

The taxonomy regulation is a classification framework providing investors with a common language to identify which economic activities and investments can be treated as environmentally sustainable.

For asset managers and firms that provide investment advice on funds which are described as sustainable, it means they will need to ensure that they use the taxonomy framework when making disclosures about the sustainability of investments.

They will also have to disclose the proportion of underlying investments that are taxonomy aligned as a percentage of the investment, fund or portfolio.

The regulation, which comes into effect at the end of 2021, uses thresholds to consider how activities contribute to the EU’s environmental objectives, including climate change mitigation, climate change adaptation, and pollution prevention and control.

It is also hoped the taxonomy will reduce greenwashing, where companies make questionable claims about their green credentials.