The European Union put forward a package of measures that took aim at the patchy data available around sustainable investing, seen as one of the fast-growing market’s biggest problems.
The bloc’s executive arm in Brussels proposed making companies for the first time report standardized information about their impact on their environment, and social metrics, such as how they treat their employees.
The EU wants the rules to apply to both publicly-listed firms in Europe and large private companies, a total of nearly 50,000 entities. Credit institutions, including the large U.S. banks that have subsidiaries in the EU, would also have to comply. The bloc also unveiled its classification system that will define green investments, and said the taxonomy will apply from next year.
If passed, companies in the EU will have to start disclosing sustainability metrics, similarly to financial reporting. The taxonomy is expected to be used as a tool to cut down on “greenwashing,” a term that describes an exaggeration of sustainability claims. The initial version of the taxonomy labels bioenergy as green, but doesn’t include nuclear energy and natural gas, although this may be revised.
More on Sustainability
Sustainability has emerged as a hot topic in finance. It is commonly known by the acronym ESG, which stands for environmental, social and governance—three pillars on which companies are judged.
Anne Finucane, vice chairman of Bank of America and leader of its ESG efforts, thinks U.S. regulators will soon follow those in Europe in putting standards in place.
“Data is an issue,” she said. “There is no consistency, it’s challenging.”
A key question for banks is whether they will have to release information about the environmental and social impact of the companies and projects they finance. Bank of America is building ESG metrics into its lending process in anticipation, while Morgan Stanley has pledged for its financed emissions to reach net zero by 2050, but is still in the early stages of planning how. Net zero would mean that the carbon emissions of its polluting investments are fully offset by clean energy assets.
Capital flowing into funds marketed as ESG-friendly reached $152 billion in the last three months of 2020, up 88% on the previous quarter, according to Morningstar. Over 700 new funds were launched last year, as asset managers raced to get a piece of this wave.
This corner of finance has been unregulated until recently and fund managers have been free to set their own, sometimes conflicting, definitions of what constitutes an ESG investment. Regulators around the world are seeking to address this.
In the U.S., the Securities and Exchange Commission put together a task force in March to investigate socially responsible investment funds. Officials have also said that they are working on a disclosure framework, and that they have found instances of potentially misleading claims.
In 2015, the U.K.’s Financial Conduct Authority put together a similar task force that encouraged companies to make climate-related financial disclosures on a voluntary basis. On March 24, it announced a public consultation on whether to make these disclosures mandatory.
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The EU has already begun to impose regulation. It put rules into effect on March 10 that sought to force funds to back up their ESG claims, and made disclosure on sustainability risks mandatory. Fund managers must make public the possible impact of their portfolios on the wider world, using metrics such as the carbon emissions of the companies they hold. However, the companies often haven’t disclosed this information because they haven’t had to, which is why Wednesday’s EU proposal was put forward.
“One of the biggest missing pieces when we look at requirements heading our way is the data available to us,” said Elizabeth Gillam, head of EU government relations and public policy at investment firm Invesco Ltd.
Dozens of data providers are trying to meet this demand. They collect information from the few companies that do disclose and use it to estimate the metrics for the rest, so its accuracy is questionable.
Industry leader CDP provides ESG data on over 9,600 companies around the world, and Trucost, a subsidiary of S&P Global Inc., models similar data for 80,000 private companies. But they don’t use the same methodologies and can get vastly different results, further complicating the issue for investors.
Without clear metrics, even industry insiders can get confused. Mark Carney, former Bank of England governor and one of the founders of the U.K.’’s climate-related financial disclosure task force, started a media storm when he said Canada’s Brookfield Asset Management Inc, of which he is vice chairman, was net zero. Mr. Carney subsequently walked back from the statement in a tweet.
Some investors don’t see better data as the whole solution and say the EU should penalize polluting companies directly rather than leaning on the finance industry.
“The idea behind this for policy makers: Instead of putting some pressure on the corporates, the investors should do the job,” said Frederic Samama, head of responsible investment at Amundi SA . “But we cannot substitute. Data is only part of the solution.”
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