The green bond market continues to evolve and develop. A new EU Taxonomy introduces even stricter standards for green projects. What does it all mean for investors, companies, and investment funds?
Just how ‘green’ are the bonds in your green bond fund? Not all green bonds are equally green, and a new EU taxonomy regulation aims to clear the air, so to speak. The taxonomy came into force in 2020 and provides criteria for a new green classification system. The first delegated act of the new, strict standards on climate change mitigation and adaptation became applicable earlier this year and the second delegated act for the remaining four environmental objectives (sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, protection and restoration of biodiversity and ecosystems) will become applicable in the beginning of next year.
Is this bad for the world of green fixed income? Absolutely not. We view this as positive for green bonds, as it creates a standardised, common definition that reduces the risk of greenwashing. The issuers’ projects and pool of assets will be under greater scrutiny, as will their reporting and disclosure.
Under the new taxonomy, the debt will be assessed according to what specific activity it is financing. However, the information provided by issuers especially in older green bond frameworks is often not even close to being detailed enough to allow for proper assessment of taxonomy alignment.
The activity will qualify as ‘environmentally sustainable’ if it makes a substantial contribution to at least one of the EU’s climate and environmental objectives, while at the same time not significantly harming any of these objectives and while meeting minimum social safeguards.
Will this directly impact funds such as the Evli Green Corporate Bond fund? No. All of the bonds in the fund are green or sustainable bonds, where the proceeds are earmarked to projects or activities with environmental benefits. The fund already meets the SFDR’s strict criteria of an Article 9 Dark Green fund.
But it will impact our analysis and reporting. As it will for everybody else. The new standards are stricter, and the reporting requirements are now greater. This may bring confusion to investors and headaches for companies. For some fund managers, this increases the need for resources and staff. Fortunately, our team is built to meet such challenges.
How do investors find a fund that’s best aligned with their green aspirations?
Investors are rightly concerned about greenwashing and elevated regulatory scrutiny. But how do investors find a fund that’s best aligned with their green aspirations? The answer lies in finding a fund manager that uses a systematic approach and has the capabilities to analyse taxonomy alignment.
Our methodology leverages ESG data on 13,900 issuers in our own internal database, along with ESG ratings and analysis from external providers, to form a solid foundation for issuer level analysis, monitoring and engagement, exclusion, and reporting. It’s our own proprietary method and the investment decisions are based on our own analysis, not the work of others.
More data is constantly being added and, as companies will report taxonomy alignment starting in 2023, the data will be more accurate and even richer. Our team of quantitative analysts create tools to handle this. Tools which are put to good use in the capable hands of our experienced Portfolio Managers, Credit Analysts and ESG Analysts.
Beyond taxonomy, we also need to assess the credibility of each issuer’s green bond framework, an analysis of their green projects, and a comprehensive ESG analysis, all of which combine to enable a thorough assessment of each issuer’s ‘green credibility’.
Our method asks the following: Does the bond adhere to the ICMA green and sustainability bond principles? Do the eligible projects contribute to achieving the UN’s sustainable development goals? And is there appropriate transparency in the project reporting?
It is very time consuming and resource-intensive to go through all this data. The demands will only increase as the taxonomy introduces mandatory disclosure obligations on some companies and investors. Fund managers with lesser resources will struggle to keep up. To prepare for such challenges, we have been constantly expanding our ESG capabilities over many years now.
Disclosure will be even more important. Our annual impact report provides full transparency on the impact of the funds’ investments. We also publish quarterly ESG reports on all Evli funds. The detail and clarity in our reports are sure to help our clients navigate the ever-evolving world of green investing.