Monday Morning Memo: The Current Lack Of Regulation Leads To Confusion On EU Taxonomy Disclosures

Transparency is one of the best ways to build trust between a customer and a corporation. Since this is quite old guidance, one might be wondering why the financial industry in general, and the fund management industry in particular, are so reluctant to offer the most transparency possible to their investors. Managing money for a client is a very sensitive task that needs a large amount of trust. This becomes especially true for sustainable investment strategies such as ESG or impact investing, because these strategies are often based on the values and beliefs of the investor. In addition to this, I strongly believe that transparency at the product level builds a solid foundation for investors to make informed investment decisions. Therefore, I am claiming in my reports and articles, especially where sustainable investments are concerned, that transparency is the most important topic for the investment industry to address to build investor trust in products and strategies. It will also help to avoid any accusations of “greenwashing.”

With regard to this, I was quite surprised by an action being taken by ESMA. The European financial markets watchdog—which is also looking for transparency—plans to loosen reporting duties for asset managers regarding the disclosure of the proportion of investments which are aligned to the new EU sustainability taxonomy by widening the number of asset classes which don’t have to be included in this calculation. This means that the asset basis which is eligible for the assessment is shrinking and the portion of the EU taxonomy aligned assets of the overall portfolio of an asset manager may look bigger than it would when all assets would be taken into consideration.

Having said this, it is no surprise that the European Fund and Asset Management Association (EFAMA) is backing the proposal made by ESMA since it wants to have as few burdens as possible for its members. On the other hand, it is also no surprise that the European Social Investment Forum (EuroSIF) says that this approach is not in line with the objective of the rules and wants to extend the disclosure even to segregated accounts and mandates. This means all assets managed by an asset manager will be taken into account to achieve as much transparency as possible with regard to the general alignment of assets to the EU taxonomy. In this regard, it is noteworthy that ESMA is also thinking about requiring the rules for all assets, not only for regulated collective investment vehicles, but has made no decision about this yet.

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