Analysis-One classification to rule them all? Investors are confronted with green investment rules by Reuters

ছবি Photo from Reuters file: A field of solar panels can be seen near Roston, UK, April 2, 2021. Pictures taken with drones. Reuters / Matthew Childs

By Hugh Jones, Kate Abbott and Simon Jessup

LONDON (Reuters) – For years after allegations that there were no rules for determining what constitutes a “sustainable” investment, investors are now worried that it may not be easy to navigate too soon.

The governments of Asia, Europe, and Latin America have created more than 30 classifications to highlight what green investment is and is not, each reflecting the national economic diversity that can plague global capital markets with billions of dollars in sustainable funding.

The European Union will introduce its green investment classification or general framework in January to help asset managers within the bloc and make green activities more visible and attractive to investors.

The rules also aim to stop “green washing,” through which companies increase their environmental certifications.

Britain, host of the COP26 Climate Change Conference from October 1, is set to finalize its own classification next year, but has already indicated that it will not just be reflected across the channel.

“We think there’s probably a strong case for secession from the EU,” said Ingrid Holmes, executive director of the Green Finance Institute and chairman of a panel advising the UK government on its classification.

The search for a global alliance

Holmes said most of Britain’s taxonomy would probably merge with the EU, but it would also draw inspiration from Chile, as a large number of mine owners in the UK stock market and others from China’s agri-centric rules book, Holmes said.

It may be appropriate for investors in UK assets and asset managers to provide their funds to UK investors. But for those with a global outlook, different classifications are a headache.

“We can live in harmony, but having patchwork of different regulatory standards and procedures adds different judicial costs, but it also increases investor confusion,” said Chris Cummings, chief executive of Britain’s Investment Association Industry Body, at a parliamentary hearing last month.

He said the amount of money in sustainable investments is now “unprecedented”, but different rules are emerging when asset managers seek global alignment in standards.

Different rules make it difficult for asset managers to acquire skills through automated investment analysis, market participants said.

“If I live in Malaysia or I live in Australia or I live in Japan or Canada and I need local reporting with a different structure and I’m trying to trade internationally, I have a fake cost,” said Nathan Fabian of the UN-backed group PRI. Who encourage responsible investment.

Some major markets, including the United States – are not expected to introduce nationwide classification.

“The United States is unlikely to follow the EU approach to developing a taxonomy that includes regulation in the United States,” said Eric Pan, chief executive of the Institute of Investment Companies, a U.S.-funded industry firm.

“We believe (the US regulator) that the SEC should make proper corporate disclosure of climate information mandatory.”

Taxonomy to defeat all taxonomy

Next month the International Platform on Sustainable Finance, an organization whose members the EU, UK, Canada and Japan, will publish a report on common features in existing taxonomy, to try to create a partial reference to how different countries are defining green investment. .

The purpose is to help investors compare jurisdictions, and to strengthen the principles that should be followed in future taxonomy.

A spokesman for the European Commission said the key features of taxonomy should be shared as a goal of joining the Paris Climate Agreement.

“International cooperation is crucial to avoid significant differences that could lead to higher administrative costs and thus hinder the flow of green capital across the border,” the spokesman said.

But based on the major economies’ own proposals, and the United States has no plans to introduce any at all, some asset managers are not optimistic about international coordination, even in the basic design features of the classification.

Joshua Kendall, head of responsible investments at Insight Investments, said: “I think it’s very unlikely that we will ever reach a position where we can have compliant guidelines and definitions.”

Michael Marshall, head of sustainable ownership at the pension scheme Railpen, agrees: “I don’t see policymakers in different countries resisting the temptation to outdo their neighbors and have classifications to lose all classification.”

Dual purpose

The 27-nation EU’s classification is likely to be the most comprehensive and stringent when it launches next year. The European system will set specific criteria for emissions and other metrics that must classify each economic activity as a green investment – although it can still fill controversial gaps, such as whether to include gas and nuclear energy.

It could see funds interested in burning their sustainable certificates that they could connect themselves more closely to the structure of the European Union.

In terms of their market size and early rollout, systems in the EU and China are being used as starting points for the development of other national taxonomies.

South Africa’s taxonomy, for example, has largely followed the EU approach, while Russia and Mongolia have come from the Chinese blueprint – despite differences in detail and coverage levels, according to a UN study on sustainable investment rules published last month.

Market participants still see a limit to the potential global coordination, as countries are designing hierarchies to help meet changing national climate targets from state to state.

The EU plans to reduce its free greenhouse gas emissions by 55% from 1990 levels by 2030. China’s goal is to stop its annual mission shift growth by that date.

“There is a dual purpose in determining the need for local investment for the global financial market, which may vary from country to country, and there is only one underlying tension that we need to reconcile,” Holmes said.

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