Feedback to the Proposal for a regulation on the establishment of a framework to facilitate sustainable investment (EU Taxonomy)

Transcription

1 Feedback to the Proposal for a regulation on the establishment of a framework to facilitate sustainable investment (EU Taxonomy) SD-M is the global pioneer for standardized ESG integration: SD-M s global standards of SD-KPI standards for material ESG indicators have been developed since 2004 supported by the German Environment Ministry (BMU), SASB, accountants as well as global investors and analysts. The SD-KPI Standard might serve as an orientation for the EU TAXONOMY. This development was started to guide companies, investors and accountants regarding the DISCLOSURE of relevant non-financials key performance indicators in Management Reports according to the EU Modernisation Directive 2003/51/EC. Since 2009, SD-M s SD-KPInform database has transparently evaluated Sustainable Development Key Performance Indicators (SD-KPIs) for more than 5,000 companies worldwide. SD-KPInform allows asset owners, investment managers and index providers the systematic integration of material ESG indicators into investment processes for equity and fixed income (SD-KPIntegration ), cf. The istoxx SD-KPIndex family has been developed by the index provider STOXX and SD-M to integrate material ESG indicators into mainstream BENCHMARKS (EURO istoxx 50 SD-KPI, istoxx Europe 50 SD-KPI, istoxx Europe 600 SD-KPI), cf SD-M s new headquarter is the innovative (GreenFin)TechQuartier in Frankfurt, POLLUX-Skyscraper, Platz der Einheit 2, Frankfurt am Main. SD-M GmbH c/o TechQuartier, POLLUX- Skyscraper, Platz der Einheit 2, D Frankfurt am Main Managing Director: Florian Brechtel Frankfurt am Main, 23 rd August 2018 Phone: brechtel@sd-m.de Website: 1

2 The following objectives of the taxonomy must be clarified or defined: Rough guide or standard? Should the taxonomy be a rough guide (in German: Orientierungshilfe, quote Michael Schmidt, DEKA management) or a "minimum standard" for sustainable (niche) or responsible (mainstream) investments (and thus indirectly also a minimum reporting standards for companies according to the CSR Directive Directive 2014/95/EU for non-financial disclosure)? SD-M would consider the latter to be the most appropriate course of action. ESG, please! E and a little S is not enough. E, S and G are the permanently predominant dimensions for responsible investment based on the globally dominant PRI principles with around 2,000 signatories and around USD 80 trillion of Assets under Management. Source: UNPRI Principle 1: We will incorporate ESG issues into investment analysis and decisionmaking processes. Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices. Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest. Since there are already globally similar standards/codes for G, reference could be made to a Corporate Governance Code/standard as a criterion. A supplementary EU taxonomy only for E and S would be very helpful. 2

3 However, E and S cannot be separated globally; simply because of the two pillars of sustainable development: "Environment" and "Development" (later: economic and social development), cf. Brundtland Report of the "World Commission on Environment and Development", 1987, United Nations Conference on Environment and Development (UNCED), 1992, World Summit on Sustainable Development" (WSSD), Rio+10, 2002; Environmental protection and development and the fight against absolute poverty are thus the foremost, important goals of the international community of states and the guiding principle of sustainable development for the 21st century, see M_fuer_Banken.pdf, p. 4f. E and S are also inseparable due to the numerous interdependencies; cf. for example p. 119 or BMU, SD-M (ed.), p. 5. It can therefore easily be argued that the EU's (initial) focus on climate protection criteria is wrong, just think of the tank or plate debate (biofuel from food). Only proportionate consideration of S by ILO standards, as proposed in the Taxonomy Regulation, should be rejected, since social factors can also be material for investors beyond ILO core labour standards, e.g. drug safety in the pharmaceutical industry, cf. USD 2 billion settlements with 10,000 claimants (users of contraceptives), cf. and a yer_gb15.pdf, p Should the EU taxonomy serve the niche and/or the mainstream? Should the taxonomy only serve the sustainable niche (and make it even more complicated and expensive) or should it also especially ensure responsible volumes in the mainstream of assets and liabilities? SD-M would consider the latter more appropriate. Which asset and liability classes should be influenced? Which asset and liability classes should be influenced by EU taxonomy? The most important asset classes in terms of volume are equities, corporate bonds (and government bonds, not yet considered in the taxonomy!) and real estate, followed by alternatives such as infrastructure investments, hedge funds, private equity, etc. The most important liability classes are corporate loans, real estate loans and retail/consumer loans. Should the EU taxonomy only apply to sustainability funds, green bonds and "Environmental credits" for wind, solar, etc. a great opportunity for integration into the mainstream would be wasted. The new differentiation between "responsible" (mainstream) and "sustainable / sustainable investments" (niche), which applies to BVI/EFAMA and Forum Nachhaltige Geldanlagen (FNG) since 2018, has NOT yet been foreseen in the EU Proposals for Sustainable Finance. 3

4 So far, Article 1 states "Subject matter and scope": (a) "... in respect of financial products or corporate bonds that are marketed as environmentally sustainable" (b) "... participants offering financial products as environmentally sustainable investments or as investments having similar characteristics" And Article 2 "Definitions" in 'financial products' refers to Article 2 (j) of the DISCLOSURE Regulation (2018/0179 (COD) Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341), which is very comprehensive: "financial product' means a portfolio management, an AIF, an IBIP, a pension product, a pension scheme or a UCITS;" or "financial product": a portfolio management, an AIF, an IBIP, a pension product, a pension scheme or a UCITS;" Granularity of the EU taxonomy: Simple or complicated? Demands of Mr. Horn, Head of Department of the Germane Environment Ministry (BMU), at FNG-Dialog, 5 June 2018: - technology-neutral - practical for users - not too complicated - simpler taxonomy would also make it easier for small financial service providers such as savings banks, local cooperative banks and asset managers to understand and advise them. SD-M would agree that a low granularity would be better suited to the mainstream of responsible investments. If necessary, even higher/further requirements for the sustainable niche could be formulated. Basically, the focus of the Taxonomy Regulation on economic activities is unsuitable, at least for the large asset classes equities and corporate bonds, because it is far too granular and often highly complex. In theory, the ESG valuation of a company (a stock/corporate bond) would be conceivable based on the sum of all its economic activities, but in no way in the current practice/reality of sustainable or responsible investment. A definition of economic activities can only make sense for certain green bonds, project or credit financing of specific, clearly defined and separable activities such as the construction of a wind farm or solar park. In this context, it may make sense to develop several (adapted) taxonomies for different asset or liability classes. 4

5 Products and services of companies would be suitable as a screening criteria of the EU taxonomy, as indicated in Article 14 1 (f), e.g. sales share of renewable energies in the total sales of an energy supplier; sales share of tourist travel with ESG integration. Further appropriate objectives within Article 14 "Requirements for technical screening criteria": (a) identify the most relevant contribution to the given environmental objective: Note: most relevant for the financial performance would be more important for mainstreaming responsible investments; also from the perspective of companies, which should report the non-financial key performance indicators relevant to the particular business (and thus the long-term financial performance of investors) according to Article 19a (e) of the CSR Directive 2014/95/EU, see German Environment Ministry (BMU), SD-M (Ed.): and (b) specify minimum requirements (c) quantitative (d) build upon union labelling and certification schemes This is conceivable for some economic activities, at company level (shares and bonds) only partially (ISO14001/EMAS certification; sales shares of sustainably certified products/services/raw materials/supplies) It would be BETTER here to build upon existing ESG KPI standards instead of "reinventing" the taxonomy completely, in particular: - SASB, US standard for ~5-15 key issues for ~80 SASB Sectors, see - SD-KPI Standard , SD-M s global standard of standards, which has been developed since 2004 supported by the German Environment Ministry (BMU), SASB, accountants as well as global investors and analysts (3 most relevant "Sustainable Development Key Performance Indicators" for 68 GICS Industries), latest version is the SD-KPI Standard , which is available in an English, Japanese and Chinese version, see - ~30 material KPIs in GRI Standards (Economic, Environmental, Social), cf. Problem: Companies should determine their own materiality and the KPIs are NOT sector-specific, with the exception of fragmentary sector guidance, cf. 5

6 - DVFA KPIs for ESG, cf. up to 80 Key Performance Indicators for ~130 ICB sub-sectors"; Problems: Could 80 indicators per company still be called Key indicators; most important KPIs not highlighted as such. - German Sustainability Code (DNK) with around 20 criteria, based on 28 GRI indicators and 16 KPIs from DVFA, cf. de_2017.pdf, Problem: currently no industry-specific KPIs, thus focusing, materiality often difficult to achieve for the reporting companies or investors as a target group. (e) all relevant economic activities within a specific sector The materiality of the KPI is mainly sector-specific! Therefore, an appropriate sector-specific industry classification and taxonomy is required: Taxonomy draft ("Informal Supplement Document on Sustainable Taxonomy... - not an official HLEG Document", cf. sustainable-finance-final-report-annex-3_en.pdf) is unsuitable, at least for mainstreaming responsible investments, since much too granular (even in DIN A3 not decipherable with the naked eye) - in particular, the EU/EIB industry classification, which is probably related, is perhaps also conceivable for liability classes such as environmental credit financing (wind/solar), but certainly NOT applicable for the large asset classes equities and corporate bonds - this requires a sector classification common on the capital market; only two are possible: globally dominant MSCI / S&P GICS (Global Industry Classification Standard), see it or not, this is by market power via MSCI and S&P indices the leading industry system on the global capital market and this cannot and will not change with ESG Investments / Taxonomy! Mainstreaming responsible investment needs such a market-dominant industry system, otherwise one is not connectable. - follows by a wide margin: FTSE / STOXX ICB ( more EU-based, but not really connectable for global capital markets and globally operating companies. - possible ESG compromise: adapted GICS of the Sustainable Accounting Standards Board? See further subdivided into Industries. 6