PRI report outlines recommendations to ensure clarity and ease the reporting process.
Early-adopter asset managers are struggling to use the EU environmental taxonomy to measure the sustainability of their funds and inform investment decisions.
According to a new report by the UN-convened Principles for Responsible Investment (PRI), the core challenges revolve around uncertainty as to the taxonomy’s final scope, continued limitations in data and difficulties interpreting the criteria.
Serving as an update to the PRI’s 2020 ‘Testing the Taxonomy’ report, the latest study has explored how asset manager signatories used the taxonomy last year, outlining recommendations for both asset managers and policymakers to address highlighted concerns.
Prior to the first delegated act (DA) of the taxonomy coming into force in January 2022, 400 PRI asset manager signatories referred to the framework to measure sustainability outcomes for their investments on a voluntary basis throughout 2021. In comparison, around 1,400 signatories referred to the UN’s Sustainable Development Goals and over 800 referred to Paris Agreement targets.
The environmental taxonomy categorises industries and activities that are considered sustainable and therefore suitable for investment via ESG-labelled fund solutions. Under the regulation, qualifying investors are now required to report on the taxonomy eligibility and alignment of their sustainability-labelled funds against activities included in the Climate DA.
It is anticipated that the percentage of signatories implementing the taxonomy will increase over the course of 2022, as asset managers comply with both the regulatory demands of the taxonomy and the EU’s wider sustainable finance agenda, such as the Sustainable Finance Disclosure Regulation (SFDR).
Participating asset managers identified several challenges with implementing the taxonomy into their investment strategies. These included questions over if, and on what terms, gas and nuclear energy will be classified as sustainable energy, limited public data on assets’ degree of taxonomy alignment, and uncertainty regarding how the taxonomy’s technical screening criteria (TSC) for sustainable activities should be interpreted.
Potential solutions
Asset managers should engage with investee companies on their taxonomy alignment to try to address data gaps as much as possible, the PRI said, as well as build an audit trail of the data used to make KPI recommendations, establish cross-functional working groups to oversee implementation, and conduct “thorough due diligence” on any third-party data assessments. Further, asset managers should look to engage with policymakers and supervisors for clarification on implementation questions, the report said.
“The important thing is to think about timeframes,” said Alex Stevens, CEO of Greenomy, a green fintech that has developed a platform to consolidate ESG reporting requirements. “The taxonomy is here for the next 30 years at least. It might seem challenging to implement in the short term, but it’s very valuable over the long term.”
The PRI called for policymakers to provide additional clarity on regulatory timelines.
“There has been significant uncertainty surrounding deadlines for taxonomy disclosure. Regular and clearly-worded updates on timelines should be provided to investors, preferably through a dedicated webpage. These resources should clarify the difference between entity and product-level disclosures and explain different requirements related to the SFDR and taxonomy regulation,” it said.
The PRI also suggested policymakers take steps to facilitate data collection, offer additional guidance on how to interpret the taxonomy’s TSC, and collaborate internationally to harmonise taxonomies to ensure global interoperability.
The final scope of the Taxonomy Regulation could broaden significantly. As well as finalising the TSC for the remaining four environmental objectives, the European Commission’s Platform on Sustainable Finance also recently published its final proposals for a social taxonomy and extended taxonomy, which could also potentially be implemented into the existing framework and therefore expand asset managers’ reporting requirements.
