ANALYSIS-A taxonomy to govern them all? Investors face a myriad of green investing rules

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Band Huw Jones, Kate Abnett and Simon Jessop

LONDON, October 19 (Reuters)After years of complaints that there were no rules for determining what constitutes a “sustainable” investment, investors now fear that there will soon be too many to navigate easily.

Over 30 taxonomies describing what is and is not a green investment are compiled by the governments of Asia, Europe and Latin America, each reflecting the national economic peculiarities that may plague a global capital market that has saw billions of billions pouring into sustainable funds.

The European Union will present 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.

The rules also aim to eradicate “greenwashing”, whereby organizations exaggerate their environmental credentials.

Britain, which is hosting the COP26 climate change conference from October 31, is expected to finalize its own taxonomy next year, but has already signaled that it will not just replicate what is established across the Channel. .

“We believe there are probably good reasons to depart 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.

IN SEARCH OF GLOBAL ALIGNMENT

While much of UK taxonomy is likely to match that of the EU, it will also draw inspiration from Chile, given that the UK stock market is home to a large number of miners, and Chinese rules focused on agriculture , among others, said Holmes.

This may be suitable for asset managers investing in UK assets and offering their funds to UK investors. But for those with a holistic approach, the different taxonomies are a puzzle.

“We can live with consistency, but different jurisdictions with a patchwork of standards and different regulatory approaches increase costs, but it also increases investor confusion,” said Chris Cummings, CEO of Britain’s Investment industry body. Association, at a parliamentary hearing last month.

The scale of money invested in sustainable investing is now “phenomenal”, he said, but different rules emerge when asset managers seek global alignment with standards.

Different rules also make it difficult for asset managers to achieve efficiency gains through automated investment analysis, market participants said.

“If I am in Malaysia or Australia or Japan or Canada and I have a local reporting requirement with a different framework and also try to trade internationally then I have duplicate costs. . ”said Nathan Fabian of PRI, a United Nations-backed group that promotes responsible investment.

Some large markets, including the United States, should not launch a national taxonomy at all.

“The US is unlikely to follow the EU’s approach of developing an integrated taxonomy into regulations that defines which activities are sustainable and which are not,” said Eric Pan, chief executive of the US body of the fund industry, the Investment Company Institute.

“We believe the SEC (US regulator) should prioritize the proper disclosure of climate information by companies.”

TAXONOMY TO BEAT ALL TAXONOMIES

Next month, the International Platform on Sustainable Finance, an organization whose members include the EU, Britain, Canada and Japan, will release a report on common features of existing taxonomies, in an attempt to create a common benchmark on how different countries define green investments. .

The aim is to help investors compare jurisdictions and consolidate the principles that future taxonomies should follow.

A spokesperson for the European Commission said taxonomies should share key characteristics such as the goal of aligning with the Paris climate agreement.

“International cooperation is crucial to avoid substantial differences which could lead to higher administrative costs and, in turn, hamper cross-border flows of green capital,” the spokesperson said.

But with the big economies set on their own proposals and the United States not at all planning to introduce any, some asset managers are not hoping for international coordination, even on the basic design features of taxonomies.

“I think it’s very, very unlikely that we’ll ever get to a position where we can have an agreed-upon set of guidelines and definitions,” said Joshua Kendall, responsible investment manager at Insight Investment.

Michael Marshall, Head of Sustainable Shareholding at the Railpen Pension Scheme agrees: “I don’t see policymakers in different countries resisting the temptation to outdo their neighbors and have the taxonomy to beat all of them. taxonomies.

DUAL PURPOSE

The taxonomy of the 27 EU countries looks likely to be the most comprehensive and strict when it is launched next year. The European system will set specific criteria on emissions and other measures that every economic activity must meet to be classified as a green investment – although it still has controversial gaps to be filled, such as the inclusion of gas and gas. nuclear energy.

This could see funds keen to rebuild their sustainable footprint seek to align more closely with the EU framework.

Given their market size and early deployment, EU and Chinese systems are used as a starting point for the development of other national taxonomies.

For example, South Africa’s taxonomy largely followed the EU approach, while Russia and Mongolia drew on the Chinese model – albeit with differences in levels of detail and coverage. , according to a UN document on sustainable investment regulations released last month.

Market players still see a limit to possible global coordination, as countries design taxonomies to help meet national climate goals which vary from state to state.

The EU projects a 55% reduction in its net greenhouse gas emissions by 2030, compared to 1990 levels. China’s goal is for its annual emissions to stop increasing by that date.

“Taxonomies serve the dual purpose of defining local investment needs, which can vary from country to country, for a global financial market, and there is just an inherent tension that we will have to reconcile,” said Holmes.

FoSDA taxonomy graph https://tmsnrt.rs/3ANwZx6

EXPLAINER-What is the taxonomy of sustainable finance in the EU?

(Reporting by Huw Jones, Simon Jessop and Kate Abnett in Brussels; Editing by Emelia Sithole-Matarise)

(([email protected]; +44 207 542 3326; Reuters messaging: [email protected]))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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