May 31, 2021

Monday Morning Memo: Why Should the EU Commission Extend the EU Taxonomy for Sustainable Investments?

by Detlef Glow.

By observing the current trends in the European fund industry, I have the feeling that sustainable investment strategies will become increasingly focused on environmental aspects—the E in ESG—instead of taking a holistic view. This trend is obviously driven by the decision of the EU Commission to focus its action plan on financing sustainable growth on environmental aspects, as the EU wants to be the leading economic area with regard to the reduction of greenhouse gas emissions in the fight against climate change. This is not only true when it comes to fund launches—even established funds are getting repurposed to meet the new specifications of a sustainable fund under the Sustainable Finance Disclosure Regulation (SFDR). This means we are seeing that some funds which were following a broader ESG-related investment strategy are now focusing on environmental topics.

From my perspective, the new regulation will disappoint a number of investors since an investor who is looking for a sustainable investment product might want to see that the respective product also takes social aspects and governance issues into account. In many cases, social aspects are for these investors at least as important as environmental aspects, as the Boohoo case showed in 2020.

Therefore, the EU Commission needs to extend the current regulation to social and governance topics as soon as possible. Such an extension of the EU regulation would also support the achievement of the Social Development Goals (SDGs) of the United Nations (UN). In addition to this, a taxonomy that covers all ESG aspects would help to avoid greenwashing because it would increase the overall transparency in the European fund industry. Unfortunately, we are not seeing any serious attempts from the EU Commission to tackle this weakness of the current regulation at the moment. My hope is that the lawmakers in the EU will be urged to look into these aspects by non-governmental organizations, consumer protectionists, and industry associations like social investment forums (SIFs) sooner rather than later.

The views expressed are the views of the author, not necessarily those of Lipper or Refinitiv.

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