EU Taxonomy - challenges for asset managers

It was a real pleasure to have an insightful discussion panel organised during the FT Ignites Europe’s webinar on the Taxonomy Regulation and the challenges it creates for asset managers. The webinar can be viewed here (available for FT Ignites Europe subscribers only).

Greening our future economies is not a quick fix. It requires dedication, financing, clear objective setting, intermediate milestones and clear and workable parameters.

And that is what EU regulators aim to achieve with its Taxonomy Regulation. The Regulation sets six clear environmental objectives (including climate change), it selects economic activities and sectors which are considered most impactful for these objectives and establishes clear parameters through detailed and specific technical screening criteria which will be reviewed and upgraded as we go.

The Regulation creates both opportunities and challenges for asset managers.

It creates opportunities by creating a green tag which asset managers can use to confidently brand their financial products as green and benefit from market/investor trust.

However, the Taxonomy Regulation also creates a few challenges which will need to be tackled before asset managers can benefit from it. To mention a few:

• The technical screening 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 want to move to greener economies, it creates challenges for asset managers investing in non-liquid assets such as for example infrastructure and real estate. There is an issue with predictability of future thresholds.
• The EU Sustainable Finance Disclosure Regulation (SFDR) applies at an investment level (e.g. investee/portfolio company is assessed as a whole) but Taxonomy assessment looks through and considers the sustainability of specific economic activities/business lines of the company. Asset managers investing in SFDR Article 8 or Article 9 products with Taxonomy-aligned investments must grapple with two different concepts which do not always match.
• The generic nature of the requirement under the Taxonomy Regulation for economic activities to comply with minimum social safeguards creates challenges for implementation. What is it that the asset managers must do to comply with these requirements? Is it sufficient to make sure that the investee companies have the right policies and procedures in place? Or do they need to go much further and monitor the application of such policies/procedures in practice? And what should the level of such monitoring be? Hopefully this will be resolved by extending the Taxonomy to social objectives.
• The technical screening criteria are linked to existing EU legislation (e.g. EPC attestation for buildings). This makes sense. However, the challenge is the application of such thresholds/requirements outside the EU borders. As we know, in the real world, asset manager investment activities are, most of the time, not limited to national/EU borders. Should the real estate asset managers send an EU expert to third countries to get the attestation? Should they look for equivalent regimes in third countries? And if yes, are we certain about their equivalence and who bears the risk for differences in quality between different attestation regimes?
• Last but not least, the three “Ds” – data, data, data. Data is there. However, good quality, comparable data is a huge challenge for the asset managers wanting to use the EU Taxonomy. While the EU regulator recognises this and tries to address the challenge by imposing disclosure obligations on the downstream part of the investment chain (e.g. by broadening the scope of the Non-Financial Reporting Directive/NFRD), the landscape remains patchy. The new regulatory measures do not apply to all underlying investments. For example, the NFRD will not apply to small non-listed entities or other type of assets such as infrastructure and real estate. Furthermore, the EU regulator’s efforts are limited to EU businesses and (as mentioned above) asset managers operate across geographies.