The European Union’s (EU) taxonomy, on environmental, social and governance (ESG), is to be implemented in 2020. The concept of the taxonomy is that when investors begin to align their portfolios with low-carbon activities, it will transition the European economy towards achieving net-zero CO2 emissions by 2050. This is likely to put pressure on Asia to follow, in order to prevent their asset managers and asset owners from being marginalized.
To begin with, asset managers and investors from Asia or non-European countries have to comply with the taxonomy and new EU regulations if they want to do business with EU. For instance, EU is using increased disclosure as a tool for measuring how portfolios are positioned to achieve EU’s goal of a low-carbon economy. Consequently, asset managers and investors in Asia have to make their portfolios more transparent even if they are not required to do so in their countries.
Additionally, the EU taxonomy and action plan will make it easier for regulators to assess and monitor how asset managers and investors position their portfolios. The taxonomy will also help the regulators assess the level of awareness of the asset managers and investors and how they manage the risks and the issues involved in ESG. Hence, asset managers and investors can no longer present fiduciary duty as an excuse for not taking ESG-related action on the portfolios managed by them.
Furthermore, a provision, which still in the draft stage, will make sustainable portfolio the mandatory default portfolio for investors. In practice, asset managers have to provide a sustainable portfolio as a default option though their clients have the option to choose a traditional/non-sustainable portfolio as their default portfolio.
These are some of the reasons Asian and non-European asset managers and investors have to consider the developments surrounding the implementation of the ESG taxonomy and the new regulations seriously. Furthermore, there is a strong possibility that once implemented across the EU, the taxonomy could become the basis for the global standard for ESG investing. The huge size of the asset pool will push global asset managers and investors to adhere to the new rules. Consequently, those who do not comply may well be marginalized.
Click here to read the article published in The Asset ESG Forum.
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