Several faith organisations we work with have recently mentioned how the EU Taxonomy for sustainable activities has come up in conversations with their asset managers. In this post, we explain what it is and what it means for faith-based asset owners based in the European Union.
The EU Taxonomy is a standardised tool established by the EU to identify and categorize economic activities that contribute to environmental sustainability – such as mitigating climate change, protecting biodiversity, and promoting a circular economy. Activities eligible for inclusion in the taxonomy must meet specific technical screening criteria set out in legislation. At its core, the Taxonomy seeks to provide clarity and transparency on what constitutes a sustainable investment, focusing on key environmental objectives, such as those just mentioned.
Why should faith-based investors be interested? The Taxonomy aligns with many of the values that faiths hold around environmental concerns, and by incorporating the Taxonomy into investment strategies, faith-based investors can help ensure that their finances can be used in ways that potentially reflect their values.
Faiths might want to evaluate the extent to which their existing investment portfolios align with the criteria outlined in the EU Taxonomy. This assessment can help identify areas for improvement and guide future investment decisions. They might also want to engage with their asset managers to discuss the integration of the EU Taxonomy into investment strategies. Asset managers play a crucial role in selecting investments that meet sustainability criteria and can provide guidance on incorporating the taxonomy into portfolio construction.
As a starting point, faith-based investors should expect their asset managers to demonstrate, at a minimum, familiarity with the Taxonomy. Continuous monitoring and evaluation of investment portfolios are essential to ensure ongoing alignment with faith-based principles and the objectives of the EU Taxonomy.
Faith-based investors might want to request detailed information from their asset managers about how their investment portfolios align with the criteria outlined in the Taxonomy. It's also important to understand that financial firms, including asset managers, banks, insurance, and pensions providers, are required, as of January 1st, 2024, to report on the alignment of their investments with the EU Taxonomy. However, this reporting obligation only applies to investee companies that have themselves reported this information, starting from January 2023. In other words, financial firms must disclose the Taxonomy alignment of their underlying investments, but they are only obligated to do so for companies that have reported this detail. Faith-based investors should ask their asset managers about the timing and frequency of reporting on the Taxonomy alignment of their portfolios.
It's worth adding here that the Taxonomy is not without its issues. For example, the (controversial) inclusion of nuclear power and natural gas as sustainable activities in the Taxonomy may be a cause of concern for faith organisations. Several large European businesses have also called the Taxonomy burdensome and unclear. Nevertheless, it provides a common language for investors, businesses, and policymakers, and may go some way in advancing sustainable finance objectives.