Leveraging Taxonomies: How Asset Managers Are Using New Sustainability Classification Systems – Part I – Finance and Banking

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Worldwide: Leveraging Taxonomies: How Asset Managers Are Using New Sustainability Classification Systems – Part I

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The sustainable investing market is experiencing remarkable growth: since 2018, annual cash flows to sustainable funds have increased tenfold. Now more than ever, investors and asset managers are looking for sustainable products and strategies that deliver strong financial returns. The field, however, has been haunted by claims of greenwashing and a lack of consistency in identifying what, exactly, makes an investment “sustainable.”

Sustainable or “green” taxonomies developed by governments, international agencies and non-governmental organizations (NGO) can help resolve these challenges and inconsistencies by identifying specific assets, activities, or projects that meet defined thresholds and metrics that quantify sustainability. These systems can cover the full spectrum of sustainability topics, from achieving acceptable levels of greenhouse gas emissions to meeting certain human rights standards. Among other benefits, sustainability taxonomies can:

  • help investors, asset managers and asset owners identify sustainable investment opportunities and build sustainable portfolios that meet the taxonomy criteria;

  • direct capital more effectively to priority sustainability projects;

  • help protect asset managers against claims of greenwashing by providing an independent benchmark for the sustainability performance of investments; and

  • guide future public policies and regulations targeting specific economic activities based on taxonomic criteria.

In this series of blog posts, we first provide a brief overview of some of the major existing and developing taxonomies around the world. We then set out our analysis of the ways asset managers are already leveraging taxonomies in their business based on a review of publicly available responsible investment reports. Finally, we highlight some challenges that asset managers may encounter as these systems develop and interest in sustainable investing continues to grow.

Keep reading this Part I for a better understanding of existing and developing taxonomies around the world.

Global Presentation

Sustainability taxonomies are currently being developed by a range of organizations and governments at a rapid pace. NGOs are particularly active in the debt financing sector, where organizations like the Climate Bonds Initiative and the International Capital Market Association have developed leading green bond standards that define specific projects eligible for debt financing. sustainable. In the public sector, more widely applicable taxonomies are often developed by multi-stakeholder working groups mandated by national or international authorities.

Many taxonomies reference or mimic the existing European Union taxonomy (EU taxonomy), widely regarded as the most developed system for classifying and measuring investments in sustainable finance. Officially adopted in 2020, the EU taxonomy already informs related EU regulations, such as the Sustainable Finance Disclosure Regulation, which requires covered entities to disclose whether certain financial products comply with the EU taxonomy.

Under the EU taxonomy, an economic activity is environmentally sustainable if it contributes to one of the six environmental objectives, does not significantly harm the other objectives and respects certain “minimum guarantees” related to human rights. ‘man. Delegated acts under the EU taxonomy establish additional “technical screening criteria”, or the specific thresholds and measures used to assess whether individual economic activities are sustainable.

Many other jurisdictions are currently developing sustainability taxonomies, while some have already established definitive systems. These jurisdictions include:

  1. China – in May 2021, Chinese regulators announced an updated version of the Green Bond Approved Project Catalog to help govern the Chinese green bond market. The catalog features specific projects eligible for green bond financing in China. In addition, the International Platform on Sustainable Finance, co-chaired by China and the EU, is developing a common taxonomy that identifies similarities between the EU taxonomy and the catalog of approved green bond projects. The Common Ground Taxonomy can help international investors align their business in the EU and China.

  2. Singapore – in January 2021, the Green Finance Industry Taskforce (GFIT), a multi-stakeholder group organized by the Monetary Authority of Singapore, has published its proposed framework for a green taxonomy for Singapore-based financial institutions, which is broadly aligned with the EU taxonomy framework.

  3. Malaysia – in April 2021, Malaysia launched a climate change and principles-based taxonomy that helps financial institutions assess and categorize economic activities based on five guiding principles that generally align with the taxonomy framework of the EU.

  4. South Africa – in July 2021, the South Africa Sustainable Finance Initiative completed a consultation on a draft green finance taxonomy, including metrics and thresholds to quantify sustainability, which is broadly aligned with the EU taxonomy .

  5. United Kingdom – the UK Green Technical Advisory Group, a multi-stakeholder organization involving the public and private sectors, is currently advising the UK government on the development of a green taxonomy that will build on existing systems, including the taxonomy of EU.

  6. France – in December 2015, France created the Green Fin label, which certifies investment funds that meet a series of “green” criteria. The Green Fin requirements establish a list of activities, including metrics and thresholds, that support energy and ecological transition and can qualify a fund for green labeling.

  7. Bangladesh – in December 2020, the Central Bank of Bangladesh adopted the Sustainable Finance Policy for Banks and Financial Institutions, which includes a national taxonomy in the form of a list of green products, projects and initiatives eligible for green finance. The policy is based on national regulations and international standards.

  8. Russia – in September 2021 the Russian government approved technical criteria for sustainable projects involving waste management, energy, construction, industry, transport, water supply, biodiversity and agriculture , as well as verification requirements for sustainable financial instruments. The energy criteria, in particular, are based on the EU taxonomy.

  9. ASEAN – in November 2021, the Association of Southeast Asian Nations (ASEAN) released Version 1 of the ASEAN Taxonomy for Sustainable Finance, the initial framework for a system that will provide a common language for sustainable finance among ASEAN member states. The environmental objectives of the proposal are largely aligned with the EU taxonomy framework.

In Part II, we will present our analysis of how asset managers are already leveraging sustainability taxonomies to achieve a range of different goals.

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This article by Mayer Brown provides information and commentary on interesting legal issues and developments. The foregoing is not a complete treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action regarding the matters discussed here.

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