A regulatory intermediary
For observers of the EU’s sustainable finance strategy, 2022 got off to a bold start as the European Commission pushed ahead with plans to include natural gas and nuclear energy-related activities as potentially sustainable in their ‘Green Taxonomy’.
Amid this furor, however, seemingly less attention has been paid to other parts of the regulations that have quietly come into effect from the 1st of January 2022, in which they presented their own set of challenges. An example of this is the disclosure requirements at fund level under the Taxonomy Regulation ‘Level 1’ (EU 2020/852).
According to Articles 5, 6 and 27 of the Taxonomy ‘Level 1’ text, it appears that from 1st From January 2022, Articles 8 and 9 products (as defined in the Sustainable Finance Disclosure Regulation (SFDR)) must disclose the proportion of investments that contribute to the first two objectives of the EU taxonomy. This timeline is now misaligned with the SFDR ‘Level 2’ text, which is affected by several delays and would typically work to define the calculation methods and rules for presenting taxonomy reconciliation in fund disclosure documents.
The timeline below summarizes the apparent misalignment.
Figure 1: Timelines for taxonomy level 1 versus SFDR level 2 regulation.
*Timeline based on the last application date stated in the EC letter dated 25/11/2021.
The above misalignment places asset managers and other product manufacturers in an unusual regulatory environment in 2022, caught between two interconnected pieces of regulation with different start dates. During this period, interpretations of taxonomy disclosure obligations and expected timelines may vary. For investors looking to make a disclosure in 2022, the difficulty is compounded by the fact that companies themselves will not be mandated to report the adjustment until 2023, due to timelines in the Article 8 Delegated Act.
Then there is politics. On the one hand, there may be some hesitation about being the first to make taxonomy reconciliation public, especially if disappointing numbers are found. This may be especially relevant to Article 8 funds and the fact that Nineteen of the twenty largest Article 8 funds do not discuss sustainability or ESG-related terms in their names, let alone environmental or social objectives.
On the other hand, the proliferation of Article 8 and 9 products The past year has led to raised eyebrows and the emergence of new pressure to avoid greenwashing, with accusations abounding and formal investigations in progress. In this environment, making EU taxonomy alignment public could be a fundamental way to demonstrate the credibility of green products in a quantifiable and standardized way (and possibly the only way), and some asset managers may want to do this sooner rather than later. want to prove later.
That said, it’s an interesting question how product manufacturers might address this in the current regulatory environment. So, let’s take a look at some of the approaches that market players have taken so far in 2022.
Examples of disclosure
Below are some examples of disclosure approaches and language surrounding taxonomy alignment in prospectuses published or updated since the 1st as of January 2022. Please note that the citations cited are not exhaustive, with many manufacturers including more detail on the topic of taxonomy alignment in their disclosure documents.
While this is not a statistically representative sample, we can see that the following broad approaches are being taken:
- Without committing to any level of alignment
- No commitment is made to any coordination, but it is indicated that a certain level of coordination is still possible
- Offering target alignment percentages
- Providing alignment ranges based on current coverage and available data
Article 8 Fund examples
Franklin Templeton – Franklin K2 Electron Global UCITS Fund – Article 8 fund
Dated January 2022 – Accessed 23/02/2022
“In line with its ESG methodology, the Fund promotes environmental attributes but does not commit to making environmentally sustainable investments as defined in the Taxonomy Regulation.”
HSBC global asset management – HSBC OpenFunds, including several Article 8 funds
Dated February 1, 2022 – Accessed 23/02/2022
“As part of their investment objectives, the following Funds intend to make investments that contribute to the environmental objectives of climate change mitigation and/or climate change adaptation. These Funds therefore invest in activities that, with effect from 1 January 2022, are classified under the Taxonomy Regulation as activities that contribute to climate change mitigation and/or climate change adaptation.”
“…However, the Funds cannot currently make any statements regarding the proportion of underlying investments in economic activities that qualify as environmentally sustainable under the Taxonomy Regulation, or the proportion of their total investments that comply with the Taxonomy Regulation . ”
AEGON Asset Management – AEGON Global Multi Manager Funds, including various Article 8 funds
Dated July 21, 2020, updated January 1 and February 1, 2022 – Accessed 23/02/2022
“At the date of publication, there is insufficient data available to assess investments against the technical screening criteria”
“…Therefore, the Fund Manager believes that the most prudent course of action at this time is to disclose that 0% of such Funds’ investments are in environmentally sustainable economic activities under the Taxonomy Regulation”
Dated January 2022 – Accessed 25/02/2022
“The Subfund does not undertake to invest in taxonomy-oriented investments, but it cannot be excluded that certain investments among the Subfund’s investments are taxonomy-compliant investments.”
Dated February 2022 – Accessed 23/02/2022
“While there may be investments in the Funds that involve economic activities that contribute to an environmental objective and that may be eligible to be assessed against the technical screening criteria, BlackRock is not currently in a position to describe. .to what extent the Funds’ investments engage in economic activities that qualify as environmentally sustainable and that are in line with the Taxonomy Regulation…’
“As of the date of publication, there is insufficient reliable, timely and verifiable data available for BlackRock to assess investments using the TSC”
“In addition, the Regulatory Technical Standards (RTS) under the Sustainable Finance Disclosure Regulation (SFDR), which define the methodology for calculating the share of environmentally sustainable investments and the templates for these disclosures, are not yet in force. As of the date of publication, BlackRock is not able to provide standardized and comparable information on the taxonomy of the Funds.”
Article 9 Fund examples
– Addendum to prospectus of January 2022 dated June 2021 – Accessed 24/02/2022
“The Sub-Fund aims to invest 100% in sustainable investments as defined in Article 2(17) of the SFDR, with the exception of positions in cash, liquid assets and derivatives used on an ancillary basis for good liquidity and portfolio management.”
Bernstein Alliance – AB SICAV I, including several Article 9 funds
Dated January 2022 – Accessed 24/02/2022
“These percentages are based on currently available data and only for a small portion of the above portfolios is sufficient data publicly available to assess alignment. As more data becomes available, the percentages below are expected to increase.”
Figure 2: Screenshot of alignment ranges used by Alliance Bernstein
for taxonomy disclosures (cited above)
T. Rowe Prize – Global Impact Equity Fund, Article 9 Fund
Dated January 2022 – Accessed 23/02/2022
“In addition to investing in securities that contribute to environmental objectives, the fund may invest in securities that contribute to social or other objectives. No minimum exposure to an objective is imposed on the fund, which means that the fund may sometimes only invest in securities that contribute to non-environmental objectives. As a result, the minimum share of the fund’s investments, aligned with the taxonomy regulation, could be 0%.”
From the currently available disclosures, we can see that many product manufacturers are taking the approach of not committing to any level of alignment. What may be interesting is that this does not appear to be limited to Article 8 funds. A number of Article 9 funds, which have sustainable investments as an explicit objective, also do not commit to taxonomy alignment levels above 0%.
This will be a disappointing outcome for many industry observers and end investors. Given the regulatory ‘in-between’ the market finds itself in, this is perhaps not entirely surprising.
There are a number of additional factors that may prevent product manufacturers from disclosing information, with some of the following points noted in the product information:
- The regulators are reluctant to use estimated taxonomy data and introduce the requirement of “equivalent” facts
- A lack of taxonomy-relevant reported data from companies, and the fact that mandatory reconciliation reporting for companies will not start until 2023 (via the Non-Financial Reporting Directive)
- Widespread exposure of Article 8 and 9 funds to international companies not subject to EU corporate reporting rules
Despite these limitations, some players are stepping up and trying to give end investors an indication of taxonomy alignment for the first time – which could be said to speak to the spirit of the regulations.
For now, though, it seems like most of the players are lurking. Perhaps the start of the SFDR ‘Level 2’ scheme from 1st from January 2023 will provide the sector with the clarity it needs to move forward. Until then, who else will have the courage to lead the market and demonstrate their green credentials?
To learn more about how Sustainalytics is comprehensive EU taxonomy solution can help you report your product’s EU taxonomy alignment please contact us today to speak to our expert Client Relations team.