An industry-wide effort is needed to share information and guidance if the EU Taxonomy is to be an effective tool for identifying truly green and sustainable investments, according to research from NN Investment Partners (NN IP).
The fund manager notes that sovereign green bonds and banks struggle to fulfil criteria due to insufficient information availability.
It says those issuers who are currently struggling with alignment tend to provide insufficient information, even though they might fulfil many ‘green’ criteria. It is also the case that there are issuers that do not separate out their categories into enough detail.
NN IP notes that bonds issued by banks tend to have or disclose less information about the projects they finance to perform the EU Taxonomy exercise.
Meanwhile, sovereign green bonds generally underperform largely due to the way the allocation is structured. For example, if a sovereign green bond allocates 25% to the Ministry of Environment’s office, this cannot be mapped to any Taxonomy category which makes alignment difficult and could result in being marked as ‘non-aligned’
Issuers that do well hail from the utility and transportation sector because they typically include a sizeable renewable energy allocation in their bonds.
The European Union’s Taxonomy regulations were introduced this year as part of the EU’s Action Plan to finance sustainable economic growth in Europe. The regulations provide criteria that must be met for economic activities to be classified as sustainable or green.
Asset managers will have to show their alignment with the EU Taxonomy categories in their portfolios, but NN IP) Green Bond team has already been assessing its funds’ alignment.
Isobel Edwards, Green Bonds analyst at NN Investment Partners commented: “Falling short of being 100% aligned is not a concern yet because the Taxonomy is still growing in the number of activities included and issuers are still getting to grips with the level of information and detail required to perform an EU Taxonomy alignment.
She adds, “A substantial portion of our funds will always include sovereign green bonds, which have the lowest alignment of all the assets we assessed in our portfolio. It is not that these are financing non-green projects, the allocation reports are just not written in a way where an assessment can be done, or the bond consists of an activity that is not yet covered by the EU Taxonomy, such as textile manufacturing or telecommunications.
Over the next few years, we expect a lot of change in the level of detail, especially from non-aligned issuers who want to bring up their percentages. We hope that sovereigns going forward will also consider the EU Taxonomy when developing their frameworks, to ease the work burden for investors and asset managers in sourcing the information.”
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