Pension funds are engaging with investee companies to secure environmental data that they will need to meet their own requirements under an upcoming European disclosure regulation.
The European Union currently is working to redirect private capital toward low-carbon investments, setting a broad goal that calls for asset owners and money managers collectively to invest €175 billion ($199 billion) to €290 billion a year in low-carbon activities to reduce net carbon emissions to zero by 2050.
To help asset owners and managers meet that goal, the European Commission released results June 18 from an expert working group that set out a detailed taxonomy — a classification system — for evaluating how sustainable a particular corporate activity is for the environment.
Corporate activities considered contributory to climate change mitigation could either be direct, through, for example, phasing out fossil-fuel-based power generation or through transitional activities, such as installing efficient boilers in buildings.
The taxonomy report from the working group has three main themes:
- A list of environmentally sustainable activities to guide companies and investors in their transition to a low-carbon economy.
- Guidance on how proceeds from green bonds should be invested by the issuer so that investors can clearly identify the climate mitigation benefit.
- Minimum standards for ESG or sustainable benchmarks to reduce the possibility of so-called greenwashing — making misleading or unsubstantiated claims.
The taxonomy report focused only on carbon activities but will later be expanded to five more areas, including water and waste management. The carbon taxonomy will be refined before the end of the year by the working group, which is set to develop further guidance on how to use taxonomy criteria before the commission can implement it into existing EU law.
In the taxonomy report, a wide range of activities were evaluated, including the manufacturing of plastics and fertilizers, and, for example, the activities of companies engaged in mining, construction and transportation. Under the upcoming EU disclosure rules, investors expect to be required to identify if any activities of their investee companies are permitted under existing or future EU law, verify if these activities meet taxonomy criteria and calculate if their investments align with taxonomy thresholds of how much carbon output a given activity can have. To achieve that, investors must engage with companies and have them measure the carbon output of their activities.