The European Union’s Taxonomy regulations were introduced this year as part of the bloc’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 Investment Partners’ (NN IP) Green Bond team has already been assessing its funds’ alignment. The assessment shows that the Taxonomy clearly favours certain types of activities and issuers.
As the Taxonomy is still growing in the number of activities included, NN IP acknowledges that due to the limited and still changing scope of the EU Taxonomy, 100% alignment cannot always be expected at this point in time. Sovereigns as well as banks are still getting to grips with the level of information and detail required to perform an EU Taxonomy alignment exercise. Over the coming years we expect a lot of change in the level of detail especially from non-aligned issuers who want to bring up their percentages.Those issuers who are currently struggling with alignment tend to provide insufficient information, even though they might fulfil many ‘green’ criteria. You may also find issuers that do not separate out their categories into enough detail.
Utility and transportation companies tend to do well in terms of alignment, generally because they include a lot of renewable energy allocation in their bonds and electric transportation. Bonds issued by banks tend to have or disclose less information about the projects they finance to perform the EU Taxonomy exercise. Furthermore, sovereign green bonds generally underperform largely because of the way the allocation is structured in sovereign green bonds. For example, if a sovereign green bond allocates 25% to the Ministry of Environment’s office, this cannot be mapped to any Taxonomy category so therefore, a Taxonomy alignment exercise cannot be performed, which could result in being marked as ‘non-aligned’. Although the percentage differs across NN IP’s green bond funds, their overall alignment with the Taxonomy is around 60%. This is based on NN IP’s strict methodology, published in December 2020, which employs a detailed assessment of all individual components and a conservative approach of deeming an activity non-aligned if there is not enough information given.
NN IP believes 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.
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. 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.”