It was a real pleasure to have an insightful panel discussion held during the FT Ignites Europe webinar on Taxonomy Regulation and the challenges it creates for asset managers. The webinar can be viewed here (only available for FT Ignites Europe subscribers).
Greening our future economies is not a silver bullet. It requires dedication, funding, a clear definition of goals, milestones and clear and achievable parameters.
And that’s what EU regulators aim to achieve with its taxonomy regulation. The regulation sets six clear environmental objectives (including climate change), it selects the economic activities and sectors that are considered to have the most impact for these objectives and establishes clear parameters through detailed technical selection criteria and specific ones that will be reviewed and updated as we go.
The regulation creates both opportunities and challenges for asset managers.
It creates Opportunities by creating a green label that asset managers can use to confidently mark their financial products as green and gain market / investor confidence.
However, the taxonomy regulation also creates some challenges it will need to be addressed before asset managers can benefit from it. To only cite a few :
- The technical selection criteria are not static. They will change over time (every 5 years) and will require higher thresholds for activities to qualify as environmentally sustainable. While this is understandable if we are to move to greener economies, it creates challenges for asset managers who invest in illiquid assets such as for example infrastructure and real estate. There is a problem with the predictability of future thresholds.
- The EU Sustainable Finance Disclosure Regulation (SFDR) applies at the investment level (e.g. the investee / portfolio company is assessed as a whole), but the assessment of taxonomy examines and considers the sustainability of specific economic activities / business sectors of the company. Asset managers investing in Article 8 or Article 9 SFDR products with taxonomically aligned investments have to grapple with two different concepts that do not always match.
- The generic nature of the requirement under the taxonomy regulation for economic activities to comply with minimum social guarantees creates challenges for implementation. What must asset managers do to comply with these requirements? Is it enough to make sure that the issuing companies have the right policies and procedures in place? Or should they go much further and monitor the application of these policies / procedures in practice? And what should be the level of such surveillance? Hopefully this will be resolved by extending the taxonomy to social goals.
- The technical selection criteria are linked to existing European legislation (for example, the EPC certificate for buildings). It’s logic. However, the challenge lies in the application of these thresholds / requirements outside the borders of the EU. As we know, in the real world, the investment activities of asset managers are, for the most part, not limited to national / European borders. Should real estate asset managers send an expert from the EU to third countries to obtain the attestation? Should they seek equivalent regimes in third countries? And if so, are we certain of their equivalence and who bears the risk of quality differences between the different attestation regimes?
- Last but not least, the three Ds – data, data, data. The data is there. However, good quality and comparable data is a huge challenge for asset managers who wish to use the EU taxonomy. Although the EU regulator recognizes this and tries to meet the challenge by imposing disclosure obligations on the downstream part of the investment chain (e.g. by expanding the scope of the Information Directive non-financial / NFRD), the landscape remains uneven. The new regulatory measures do not apply to all underlying investments. For example, the NFRD will not apply to small unlisted entities or other types of assets such as infrastructure and real estate. In addition, the efforts of the EU regulator are limited to EU companies and (as mentioned above) asset managers operate in all geographies.