Many investors trialling the EU sustainability taxonomy demonstrated that it was “operational and that taxonomy-alignment results are both useful and necessary”, but challenges remain, according to a report from the Principles for Responsible Investment (PRI) today.
The organisation established a taxonomy practitioners group in September last year and today’s report links to case studies from many of those involved as well as relaying key findings and recommendations, topped up with PRI analysis.
PRI said it hoped the output would foster confidence and facilitate implementation of the taxonomy.
“The investors assessed taxonomy alignment before many details of the final regulation are in place, and before widespread corporate reporting against the taxonomy is available,” said the PRI. “Many challenges remain, not least the availability of data and potential changes to the detailed taxonomy criteria.
“Nonetheless, the progress made by the group is encouraging. The case studies detailed here demonstrate that the Taxonomy framework can be operationalised, and offer important insights for investors beginning their taxonomy preparation.”
Most of the investors (89%) in the taxonomy practitioners group were investment managers, although asset owners such as €21.6bn AP Pension in Denmark and VidaCaixa Group Pension Scheme in Spain also participated.
AP Pension tested the taxonomy against a concentrated global equities portfolio and said that it felt the case study “gave us an approximation of what could be taxonomy-aligned” but that it was limited by data availability.
Advice for investors, policymakers
According to the PRI, those in the taxonomy practitioners group saw a need for future corporate disclosure obligations to go beyond the scope of the existing requirement for disclosure against the taxonomy and consider private companies.
The PRI also relayed that some investors suggested a role for policymakers to engage data providers to limit discrepancies, agree on common definitions on key terms and standardise the approach to subjective elements, while others suggested that investors should collaborate to achieve the same goals.
According to the PRI, the investors also expressed anticipation of a need for significant practical and interpretive guidance for all taxonomy users as well as clear expectations from supervisors.
“Supervisors should ensure that investors are able to clearly communicate the limitations of their analysis and the underlying data,” the PRI reported.
Another request was for a more structured approach for demonstrating compliance with minimum safeguards and Do No Significant Harm (DNSH) requirements, with PRI noting that the investors found assessing DNSH particularly challenging due to the absence of data and the qualitative nature of many DNSH criteria.
The PRI’s report also relays a wide range of advice from the members of the taxonomy practitioner group for other investors, such as “start early”, “start small”, “provide context for results” or “build ‘correspondence tables’ between taxonomy criteria, existing certification schemes and other non-EU standards”.
“But it’s also clear that to optimise taxonomy applicability, policymakers and regulators need to do more”
Will Martindale, director of policy and research at the PRI
Will Martindale, director of policy and research at the PRI, said the investors trialling the taxonomy had been “working at the cutting edge of policy design” and demonstrated “real leadership”.
“But it’s also clear that to optimise taxonomy applicability, policymakers and regulators need to do more,” he said.
Earlier this week the CEO of Swedish pension provider Alecta said he thought the taxonomy would have ”a fundamental impact across the investment chain”.
Martindale’s blog and a link to the PRI’s report can be found here.