China and EU to form “taskforce” on green taxonomies

The highlights of final days of Digifest

A “taskforce” between China and Europe on harmonising sustainable finance taxonomies is likely to be launched, said Chinese green finance leader Dr Ma Jun in yesterday’s keynote session – although he did not say when. 

 Dr Ma, who is Chairman of the China Green Finance Committee and Director at Tsinghua University’s Research Centre for Green Finance Development, told delegates that Europe and China are looking into the “very interesting issue of harmonisation of green finance taxonomies”, describing it as the next “milestone” for collaboration and an important step in encouraging cross border investment.

The proliferation of taxonomies in recent years was an issue identified by Dr Ma, who said: “Six years ago the problem was a lack of taxonomies and now we have something like 200…this is going to create a lot of confusion, a lot of transaction costs, a lot of duplication and we need to harmonise to really reduce the cost for investors and enhance transparency for the market”.

His views on the confusion around taxonomies were echoed in today’s session on the EU taxonomy, in which Aleksandra Palinska, Senior Regulatory Advisor at the European Fund & Asset Management Association said there were a number of moves that should be made by European institutions to help investors comply with the taxonomy regulation. She said a helpline or access to real time advice would enable investors to understand the taxonomy’s details more, as well as an expansion of the Non-Financial Reporting Directive to cover more companies, a data portal for sustainability information and more clarity on enforcement and grace periods as investors get used to the requirements.

Carbon markets 

Dr Jun confirmed that China’s national emissions trading scheme is still slated to be “up and running” by the end of this year. He added that plans to create “a special channel” through Hong Kong that would allow international investors to participate in China's carbon market were being explored. 

“We are looking at options to integrate the overseas carbon market with China by developing a proposal called “Carbon Connect’”, Dr Jun said. 

The proposal, he said, would be similar to existing schemes that operate through Hong Kong, which offer investors access to Chinese bonds and stocks.

On the investment risks posed by coal, Dr Jun said recent modelling work by Tsinghua University’s Green Finance Centre showed that if a bank lends to a coal project today, in 10 years’ time the probability of default on that loan will be 20%.

“That is going to be a very shocking number when it is realised by these investors and lenders”, he said, adding “we need to promote the awareness of such methodologies to change the preferences of lenders and investors”.

An update from the world’s biggest pension fund

In the final keynote for RI’s Digifest, Hiroshi Komori, Senior Director, Stewardship and ESG at Japan’s GPIF spoke about the fund’s recent joint statement with pension funds CalSTRS and the Universities Superannuation Scheme, which criticised short-termism among both asset managers & companies and rejected accusations that sustainable investing was “virtue signalling”. As at May, Komori said an additional 11 asset owners including the UK’s Brunel, France’s FRR and Holland’s ABP had signed on to the initiative. He said other asset owners who were interested to participate were welcome to contact him directly.

Kamori also touched upon GPIF’s shock December decision to suspend its stock lending programme over stewardship concerns. He revealed that prior to the move, GPIF had themselves attempted to identify stock borrowers and their investment objectives but were unable to obtain the information from lending partners.

Out with the old and in with the new

In Speaker’s Corner yesterday, ex-MSCI analyst and podcast host Matt Moscardi argued for doing away with the ESG acronym, pointing out that ESG is not an “investment process” but rather a way to organise data. As he observed, while ESG-branded products may relate to a multitude of themes, they are often sold as if ESG is a single unified approach which “disregards the curation and underlying premise” of individual products. “I’m guessing nearly 100% of institutional clients, the ones I sold ESG products to, didn’t know what ESG really was,” he said. As a solution, Moscardi proposed focusing on stakeholder instead of themes. He said: “It is now possible to measure and hold companies to account using a stakeholder model that leverages data we now call ESG.”

ESG was voted the most unpopular word in sustainable finance by our readers this week.

And this afternoon, Martyn Jones, Fund Manager Sustainable Investmentat Liontrust, said it was developing an impact investment product with measurement at its heart for a client.