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Investment Association warns EC against ‘undue focus’ on environment

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By Jon Hay
24 Aug 2018

The Investment Association, the trade body for UK asset managers, has published responses to two European Commission consultations on aspects of its Sustainable Finance Action Plan — the Taxonomy of environmentally sustainable economic activities and disclosures on sustainable investments and sustainability risks.

The documents are some of the first products of the IA’s new Sustainability and Responsible Investment Committee, set up last year, which has proved popular with members — 35 asset managers have joined the committee.

Galina Dimitrova, director of investment and capital markets at the IA, welcomed the Action Plan and said asset managers were committed to developing sustainability and responsible investment.

But she added: “As the European Commission’s package of proposals is both comprehensive and far-reaching, it is vital that these initiatives work harmoniously together and do not have the unintended consequence of putting a brake on existing economic activities that already contribute to a more sustainable economy.”

The IA also wants the plans to coordinate with other global initiatives such as the UN Sustainable Development Goals and Global Compact.

The association is concerned about the prominence given in the EU’s plans to the Taxonomy, which only covers the greener parts of the economy, which it called “a very small proportion of the market”.

“One of the challenges of the Taxonomy is that it’s designed around the EU meeting the Paris Climate Agreement goals," said Will Oulton, global head of responsible investment at First State Investments in London. "The next phase of the work has to be broader and there’s no clarity on when that will happen as yet.”

The group supports the Taxonomy as a guide to investors wanting to fulfil environmental sustainability objectives, but underlined that “environmental sustainability does not capture the full sustainability and responsible investment landscape” and that clients should be free to express their sustainable investment preferences.

“Expressing a sustainable investment preference does not necessarily mean that an investor wishes to be invested in a product that is linked to the environmentally sustainable economic activities captured by the proposed Taxonomy,” it said.

The IA said it was vital that other EU rules should not define sustainability or RI as just what is in the Taxonomy. When labels for sustainable financial products were developed later, the EU should not limit use of the word “sustainable” just to activities in the Taxonomy.

The group is also concerned that the Taxonomy’s minimum safeguards “may not demand rigorous enough corporate governance standards” and offered to lend its expertise in this area to help strengthen them.

In its response on disclosures, the IA expressed similar concerns, stating with great emphasis that integrating ESG factors into investing should not be “crowded out by undue concentration of focus on ‘environmental sustainability’.”

It stressed very strongly that “sustainability risks” should not be thought of as “risks to environmental sustainability” but as “risks to the economic sustainability of an investment which derive from environmental, social and governance concerns”. The IA said this view was “vital” and “of great importance to investors”.

It went on to argue that “the ‘E’ in the Taxonomy of environmentally sustainable economic activities is not the same as the ‘E’ in ‘ESG integration’” and that “ESG integration is an entirely separate process to the reallocation of capital to green investment products”.

It added: “an economic activity that has been deemed environmentally sustainable does not automatically become economically sustainable if it happens to comply with minimum social and governance standards”.

By Jon Hay
24 Aug 2018