The European Commission has stepped up its efforts to promote sustainable investing, but concerns remain over data availability and the timeline within which investment firms have to comply with the new guidelines.

The Commission’s Technical Expert Group (TEG) on sustainable finance published guidelines on its sustainable finance taxonomy on June 18. The technical report on the taxonomy sets out the basis for future legislation, obliging investment firms to use the taxonomy, report the proportion of sustainable factors in investments, and discuss the methodologies with which this is implemented.

From these disclosures and metrics, investors will have the ability to evaluate and compare investments and portfolios based on a sustainability score.

On June 24, in Brussels, TEG members held a Q&A session where they fielded questions from audience members, who included representatives from investment firms, on how to use the taxonomy. The questioners asked whether the commission will offer flexibility on the time allotted to them for implementing changes, such as building or outsourcing the technology needed to comply with the new standards. 

Although the initiative is seen as a progressive step in the right direction, some have voiced concerns over the challenges involved in its implementation.

They need a system to manage the data, and very few banks have that [type of] system at the moment. It will require a lot of thought and investment.

Aila Aho

Speaking on the panel, Brenda Kramer, a senior advisor focused on responsible investments at PGGM and member of TEG, said there will be some flexibility to enable firms to adapt to the new guidelines, but stressed that there is little time to prepare, and that firms such as data providers have already begun the process.

“Yes, on the one hand, it will take time, but we don’t have much more time,” Kramer said.

Over the next six months, the TEG aims to work with the industry to deal with the transition to the new standards. The group says it will organize opportunities for firms to provide feedback on the taxonomy and will hold a call in early July regarding its final version of the report, according to the Commission’s website.

Aila Aho, an executive advisor at Nordea on sustainability and a member of the TEG, said during the session that banks will also have to build out new systems to comply with the requirements, and will play an important role in issuing green bonds and loans.

“They need a system to manage the data, and very few banks have that [type of] system at the moment,” said Aho. “It will require a lot of thought and investment.”

She said small investment firms would be expected to participate as much as larger corporations, helping to make sustainable investing an industry-wide “phenomenon.”

Data Availability: A Familiar Challenge

A familiar challenge in environmental, social and governance (ESG) investing is data availability. Gaining access to the necessary information to derive a holistic view of how firms or investments rate in terms of ESG has become one of the biggest roadblocks to adoption. This is partly due to the reluctance of firms to disclose information, such as their carbon footprint, employee welfare, or their contribution to social factors.  

“Data availability is the greatest hurdle, but the taxonomy may be the greatest incentive,” said Helena Vines Fiestas, deputy global head of sustainability at BNP Paribas and a member of the TEG, during the panel discussion.

Vines Fiestas said that this initiative will be in place until it is mandatory for firms to comply with EU regulation on a taxonomy. Part of the process will include putting pressure on global companies to disclose data around ESG.

• READ MORE: As ESG data becomes more of a commodity, firms are struggling with how best to incorporate carbon data. Click here to read more.

She said that companies will have two options. They can report the percentage of their activities that are compliant with the taxonomy, or they can disclose the overall breakdown of their performance on activities against the taxonomy.

“Because the data isn’t exactly there [wholly available], the taxonomy will send a message to companies that this is what is needed from me [the investor],” Vines Fiestas said.

This is ‘not business as usual’

The tone of the discussion made it clear that investment firms will have to take TEG reports seriously, as regulation is set to follow. For now, the taxonomy only includes factors relating to climate change and the environment.

The TEG also released a second report on Climate Benchmarks and Benchmark ESG Disclosures, which includes a list of minimum standards for firms on methodologies, for addressing issues such as greenwashing and improving transparency and compatibility of indicators across ESG factors.

Vines Fiestas said that the group experts hope that the reports will begin the process of simplifying the language around environmental factors and improving transparency, steering the industry in the right direction to improve sustainability transparency across the region.