The PRI released early September a report with case studies from 37 Asset Managers—including e.g. BlackRock, Crédit Suisse, Amundi—, which agreed to test their funds regarding the Green Taxonomy compliance, to be mandatory by the end of 2021. Beyond the exercise itself, positive and necessary, what are the results, and what can we learn? Here are our three key takeaways.
- First, let’s start with the funds being tested: they are quite different, hence very difficult to compare. Some AM used fixed income, and others equity funds, another green bonds and climate change thematic funds, and even funds not proposed as “sustainable funds” on the market. Due to the heterogeneous nature of the funds, we cannot compare or benchmark the results.
- The taxonomy integration approach are also very different, each AM having its own way—but usually the method is based on external rating providers, which doesn’t support today the taxonomy requirements with their existing ESG scores, designed well before the taxonomy. Some methodologies are based on several suppliers, well known for having divergent view of a same company—the “aggregate confusion” of ESG ratings pointed out by the MIT Sloan study. Another common constatation: the great majority of AM mention the lack of trustable and exhaustive corporate data. When data was lacking, “estimates” have been made. Such a limitation obviously leads to unprecise and subjective ratings… So, yes, we definitively see here that the traditional ESG rating approach hit its limits, and the taxonomy tests case studies are the living proof of that. But how to comply with the regulation, to be applicable in 2021? All AM hope that the market leaders will provide their solutions well before the regulatory deadline—But, considering their ESG scoring approaches, and data… good luck with that.
- Eventually, the results: in a word… divergent. It seems easy to get a percentage of the eligible funds depending on the sectors—since the taxonomy defines which sectors are eligible—, but when it comes to the calculation of the compliance score with the taxonomy… well, “surprise”: one AM says less than 5%, others 20%, some other “a majority of the funds” without even providing a percentage… In brief, a nightmare—especially considering that the EU didn’t define any compliance threshold to reach.
we definitively see here that the traditional ESG rating approach hit its limits, and the taxonomy tests case studies are the living proof.
To date, the institutional or retail investors will not be able to understand anything about the taxonomy compliance, and neither who will be controlling the compliance, nor will they be able to discriminate between truly sustainable funds, and others. A taxonomy compliance percentage doesn’t mean nothing, per se: it needs to be explained, justified.
The EU taxonomy is a great project, and it’s absolutely required for the good progress of Sustainable Finance. But the road ahead will be quite long, and for the EU taxonomy to be useful, the final objective must not be lost in the process: empowering and enlightening the sustainable investors, allowing them to understand how much sustainable a fund truly is, in order to make responsible investment choices, based on trustful information— pedagogy and responsibility being shared between the companies, the AM, and the end investors.