A more globalised approach to taxonomies and a rethink on product disclosures should be prioritised at the upcoming COP27, according to Arthur Carabia (pictured), director of ESG policy research at Morningstar Sustainalytics.
Talking about his wish list for the 27th Conference of Parties, being held in Egypt in November, Carabia said these are two key areas where improvements can be made in terms of regulation.
“One of the COP21 commitments was to help developing countries from a financial perspective. Regulation can be a powerful tool to help in that regard and is often overlooked,” he said at a Morningstar ESG roundtable held on Tuesday 18 October in London.
The European Commission’s decisions around the EU Taxonomy have been widely criticised over the past year, namely for the controversial inclusion of gas and nuclear, but also for “politically interfering” with recommendations put forward by its expert group – which was against the inclusion – on that decision.
At COP27, Carabia said there is a chance to make the Taxonomy a more useful tool that can be adopted by countries outside of the EU.
“At the EU level, the so-called Taxonomy is a very interesting tool for disclosure and labels, and they have been really trying to build everything around this to channel investors to go for products that are Taxonomy aligned,” he said.
“The problem has been that it is a very self-serving tool because it is designed around EU regulations. When you try to apply this abroad it has been very difficult.
“There are components that require looking at a very specific EU regulation for each activity to make sure you are ticking the boxes – it is not easy to deploy abroad.”
Echoing comments made by Mikkel Bates, regulations manager at FE fundinfo, who called for a common taxonomy to be developed, or at least greater consistency between different science-based taxonomies, Carabia said COP27 is a chance for different regions to come together on the best route forward.
“There is an opportunity at COP for policymakers to reflect and build bridges. There has been some level of competition, everyone wants to be the leading green hub and ahead in this space, but ultimately it is a global issue and we need global correlation.”
Forward looking trajectory
Secondy, Carabia said ministers need to look at product disclosures.
“It would be interesting for regulators to look at what kind of disclosures investors will need to essentially be more connected in terms of temperature trajectory.
“At the moment, the disclosure at product level – whether that is SDFR [Sustainable Finance Disclosure Regulation in the EU], SDR [Sustainability Disclosure Requirements in the UK] etc, is very much backward looking, none is forward looking,” he said.
He added policymakers will say it is difficult to make commitments on this at this stage as they will blame poor data or say modelling around this is not yet fully developed, but overall, he added, this would help investors when selecting funds.
“We think looking at implied temperature scenarios can lead to nice, graphic, intuitive information for retail investors, which can talk to them more than some of the jargon in the Taxonomy.
“Decarbonisation targets are very important at the product level, and we were very pleased to see the European Commission mandated ESMA [European Securities and Markets Authority] to work on this so it could well be incorporated into COP objectives.”
Meanwhile, Carabia’s colleagues at Morningstar also shared their views on the current investment landscape and COP27 outcomes.
Dan Kemp, chief investment officer at Morningstar Investment Management and ESG Clarity Committee Member, said it has never been a better time to be an ESG investor, not only in equities but also in the bond markets. “Valuations are narrowing which means there are more attractive opportunities, which allows a broader group of investors to invest in a sustainable way. With these higher returns on offer to investors, this is the movement needed to hopefully attract the private capital required in order to support the COP objectives.”
Hortense Bioy, global director of sustainability research for the firm, and also an ESG Clarity Committee member, added: “The aim of COP26 was to keep 1.5 degrees alive. And it succeeded. Glasgow was a success because of the momentum it created around achieving net zero by 2050. Finance was mobilised with the GFANZ [Glasgow Financial Alliance for Net Zero]. However, the hardest work is still to come. The reality is that not enough has been done in the last 12 months – some would argue we have moved backwards.”