Huw Jones and Kate Abnett by Simon Jessop

LONDON, Reuters – Investors are now worried that too many rules will be in place to define what makes a sustainable investment.

More than 30 taxonomies outlining what is and isn’t a green investment are being compiled by governments across Asia, Europe and Latin America, each one reflecting national economic idiosyncrasies that can jar with a global capital market which has seen trillions pour into sustainable funds.

In January, the European Union will launch its Green Investment Taxonomy (or Common Framework) to assist asset managers within the bloc. This is to make green investments more attractive and visible to investors.

They also seek to eliminate “greenwashing”, in which organisations lie about their environmental credentials.

The host country of the COP26 Climate Change Conference, Britain from Oct. 31 to 31, will finalize its taxonomy next Year but it has signaled that it won’t just copy what was created across the channel.

Ingrid Holmes is the executive director at the Green Finance Institute, and chairs a panel that advises the UK government about its taxonomy.

SEARCHING GLOBAL ALIGMENTS

Holmes stated that while much of Britain’s taxonomy is likely to be compatible with the EU’s it may also draw inspiration from Chile and China, as the UK stock exchange hosts many miners.  

Asset managers may find this advantageous when they invest in UK assets and offer funds to UK investors. For those who have a global perspective, however, taxonomies can be a problem.

Chris Cummings of Britain’s Investment Association, the CEO, said that “We can live without coherence but different jurisdictions have a patchwork regulatory standards and approaches which adds costs but also increases investor confusion.”

He stated that while the amount of money flowing into sustainable investments has reached “phenomenal levels”, different rules have emerged as asset managers desire global standardization.

Market participants stated that asset managers also face challenges in achieving efficiencies via automated investment analysis because of different rules.

Nathan Fabian, a United Nations-backed organization that promotes responsible investing, said: “If I am in Malaysia or Australia or Japan or Canada and have a local reporting obligation with a different framework then I want to trade internationally then there are duplicated costs.”

It is unlikely that all major countries, such as the United States, will launch a national taxonomy.

Eric Pan, the chief executive officer of the Investment Company Institute in the United States said that the United States will not follow the EU’s approach to developing a taxonomy integrated into regulation that defines which activities are sustainable.

We believe that the U.S. regulator, SEC, should prioritize mandating corporate disclosures of climate information.

ALL TAXONOMIES CAN BE BEAT WITH THE TAXONOMY

The International Platform on Sustainable Finance (a group that includes the EU, Canada, Japan and Canada) will release a report next month on common elements in taxonomies. This is to create a common reference on how countries define green investments.

It is intended to allow investors to compare different jurisdictions and set the foundation for taxonomies in the future.

According to a spokesperson for the European Commission, taxonomies must share some key characteristics such as their aim to align with the Paris climate agreement.

The spokesperson stated that international cooperation was crucial in order to prevent substantial differences which could lead to higher administrative costs, and in turn hinder cross-border green money flows.

But with major economies set on their own proposals, and the United States not planning to introduce any at all, some asset managers are not hopeful for international coordination, even on the basic design features of taxonomies.

    “I think it’s very, very unlikely we’ll ever get to a position where we can have an agreed set of guidelines and definitions,” said Joshua Kendall, head of responsible investment at Insight Investment.

Michael Marshall, Head of Sustainable Ownership at Railpen said: “I don’t see how policymakers from different countries can resist the temptation to surpass their neighbors and have the taxonomy that beats all taxonomies.”

DUAL PURPOSE

It is expected that the EU’s 27 member countries will launch next year with the strictest and most extensive taxonomy. Europe’s taxonomy will define specific emission criteria for all economic activities to be considered green investments. It will also establish other metrics, although there will still be controversial issues such as whether or not nuclear energy is included.

Funds looking to improve their sustainability credentials could look for ways to be more aligned with the EU framework.

Because of their size market and rapid rollout, both the EU’s and China’s taxonomies are used as starting points for other national taxonomies.

According to U.N. papers on sustainable investment regulations, South Africa has followed the EU taxonomy, and Russia and Mongolia, though with different levels of coverage and detail, have largely adopted the EU approach.

Market participants continue to see limitations to global coordination. Countries are creating taxonomies in order to meet different national climate targets.

From 1990 levels, the EU plans to reduce its net greenhouse gas emissions 55% by 2030. China has set a goal for its annual greenhouse gas emissions to cease growing by this date.

Holmes explained that taxonomies have a double purpose. They define the local investment requirements, which can vary between countries, in a global financial market. “There is just an inherent tension there and we will need to resolve it.” Holmes added.