Asset managers are learning how to use and leverage the various sustainability taxonomies in the market for the development of sustainable investment solutions and, in the process, get a leg up on the competition despite the challenges involved, such as fragmentation, lack of transition-specific ones and an absence of alignment among the leading systems.
However, despite the challenges, taxonomies have the potential to significantly increase the confidence of investors and other stakeholders in sustainable investing by providing certain concrete and reliable definitions of many sustainability principles, factors and activities, indicates a review of public responsible investment reports published by asset manager signatories to the United Nations Principles for Responsible Investment conducted by legal specialist Mayer Brown.
“Asset managers proactively addressing these challenges and effectively leveraging taxonomies in their own businesses can obtain a competitive advantage at a time when the market for sustainable products is rapidly expanding,” says Mark Uhrynuk, a Mayer Brown partner whose team conducted the review.
Asset managers, based on the review results, are already applying taxonomies by integrating criteria into investment selection processes, defining metrics and methodologies for monitoring and reporting purposes, and developing new taxonomy-aligned funds, investment strategies and policies.
By integrating taxonomy criteria – applying the thresholds and metrics they use to define certain activities as sustainable – they are developing their own bespoke systems. However, one manager, for example, has generally referred to the EU Taxonomy to establish his firm’s own investment categorization and due diligence processes but does not commit to applying it or its metrics in specific ways.
Another manager, according to Uhrynuk, takes a more specific approach and has committed to only invest in companies or assets that generate 50% or more of their annual turnover from activities identified in the GreenFin label taxonomy.
In terms of defining metrics and methodologies for monitoring and reporting purposes, asset managers in general are using taxonomy criteria to enhance environmental, social and governance (ESG) and sustainability-related monitoring and reporting to asset owners.
“Taxonomy criteria are being used to set transparent key performance indicators to track, measure and report on sustainability topics, such as greenhouse gas emissions, on a portfolio-wide or an investment-specific basis,” Uhrynuk points out. “The resulting data can also be used to develop ESG or sustainability work plans for portfolio companies to improve performance on key topics.”
One asset manager, for example, tracks and reports both portfolio-wide carbon-dioxide emissions and the percentage of assets under management invested in sustainable economic activities as defined in the EU Taxonomy. Another tracks the carbon and environmental footprint of all portfolio companies and assesses their position against the EU Taxonomy.
In terms of developing new taxonomy-aligned funds, investment strategies and policies, asset managers are capitalizing on the unprecedented interest in sustainable investment by strategically launching new products incorporating taxonomy criteria from the outset.
“New funds may be marketed as sustainable based on investment strategies and policies aligned with one or more taxonomies,” Uhrynuk notes. One asset manager, for example, he adds, is now developing a sustainable fund with a “minimum EU Taxonomy eligibility target” that will focus on “certain sectors that are EU Taxonomy compliant”.
Another manager is promoting their fund’s investment strategy, which is focused on certain environmental objectives found in the EU Taxonomy, as having “strong investment alignment to the activities defined under the EU Taxonomy”.
The review also shows that many asset managers are actively engaging with governments, other private sector players and international organizations through public policy avenues to join and guide the conversation as taxonomies rapidly develop. These avenues include participation in trade association working groups, consultation responses and direct engagement with public sector bodies.
