Green taxonomy reporting should apply to companies first, say investor groups

Asset management bodies and responsible investment groups have called on European regulators to require companies to report against the EU’s new green taxonomy ahead of investors.

The European Sustainable Investment Forum (Eurosif) and the European Fund and Asset Management Association (EFAMA) were responding to a consultation by the European Securities and Markets Authority (ESMA) over new reporting rules for large, listed issuers under the EU taxonomy regulations. 

Once introduced, non-financial companies will be required to disclose a series of indicators, namely the proportion of their expenditure and revenues that matches the business activities defined in the taxonomy, while asset managers will report the share of taxonomy-aligned exposures.

Under the current proposals, both companies and asset managers will commence reporting for the financial year beginning January 2022.

In its feedback, EFAMA reiterated concerns that asset managers would find it “very difficult…to meet their reporting obligations” if the underlying taxonomy data from companies is not yet readily available. The association suggested that asset managers should be allowed to report the “planned” proportion of taxonomy-compliant investments in 2022, before reporting on their actual holdings in the following year.

Meanwhile, Eurosif suggested that companies should begin reporting 2021 historical data in 2022 (“probably in Q1”), to allow fund managers to aggregate the data and begin reporting on their exposures once the rules enter into force in 2022.

Separately, the Asset Management and Investors Council (AMIC) – the buy-side part of the International Capital Market Association – suggested that the share of taxonomy-aligned investments reported by asset managers should be calculated only as a proportion of total investments with sustainability claims. Doing so would allow investors to judge the veracity of an asset manager’s sustainable products and combat potential greenwash, the group said.

In contrast, both EFAMA and Eurosif were in favour of including all eligible asset classes in the calculation of the share of taxonomy-aligned exposure. Restricting the reporting to only sustainability-oriented investments “could create a disincentive for integrating ESG considerations into [total assets under management]”, said EFAMA.

But EFAMA and Eurosif clashed over the treatment of conventional sovereign bond holdings. Eurosif, which is in favour of including such exposures when reporting taxonomy-alignment, said that disregarding sovereign debt would boost the share of taxonomy-aligned investments for portfolios with substantial sovereign exposures while penalising other portfolios which do not hold sovereign debt.

However, EFAMA said it would be “premature…at this point” to consider conventional sovereign exposures as the taxonomy is yet to identify a methodology to assess the asset class for alignment. In addition, it pointed out that the EU’s own Green Bond Standard is yet to be finalised.

With the end of the consultation last week, ESMA will now consider market feedback and provide its input on the new disclosure rules to the European Commission by the end of February 2021.

While the new taxonomy KPI reporting rules will likely impact only a few asset managers, a raft of new rules is set to come into force next year which will require all fund firms to disclose the manner in which sustainability risks are integrated at corporate level into their investment processes and remuneration policies, as well as individual products.

For large listed companies, the new taxonomy disclosure rules complements a large-scale revision of the bloc’s Non-financial Reporting Directive which is expected to set out a unified standard for sustainability reporting in the EU. The NFRD’s first draft is due in January 2021.