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EU green investment classification set for global rollout, UN group says

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An EU classification system for sustainable investments will reduce confusion in the rapidly growing sustainability industry and will likely be adopted on a global scale, according to the head of a United Nations investor network.

Speaking to S&P Global Market Intelligence, Fiona Reynolds, the CEO of the Principles for Responsible Investing, said this taxonomy would help define sustainable finance at a critical time. As the market has grown, so have different opinions on what is green, she said.

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Fiona Reynolds, CEO of Principles for Responsible Investment.

Source: Principles for Responsible Investment

The PRI was launched by the UN in 2006 to create an international network now composed of more than 2,000 investors with more than $80 trillion in assets under management. Its aim is to apply environmental, social and governance criteria to investments by applying six principles, such as incorporating ESG in investment decisions and disclosing ESG issues at companies that investors buy into.

'What is on the label is in the tin'

Speaking on the sidelines of a Paris conference organized by the PRI, Reynolds said there are so many investors in this space that there is a need for a common language. Institutional and retail investors need to know that "what is on the label is in the tin," she said.

As part of its sustainable finance action plan, the EU has developed a taxonomy, or classification system, for green investments. It aims to define what constitutes an environmentally friendly investment and to stop companies making investments sound more sustainable than they actually are.

Reynolds said the taxonomy would be key in fighting this practice, known as greenwashing.

"If we don't get all the systems, regulation, labeling and common language in place then we are in more danger of greenwashing, which could actually bring the industry down when we have worked really hard to establish it and get it moving," she said.

"We want to see the sustainability industry [progress in] leaps and bounds — our credibility is on the line if we don't back that up."

Global reach

European investors with managers in other jurisdictions will likely start asking them if their investors are in line with the taxonomy, she noted.

"Money is global, and people are not going to want to use a million-and-one frameworks and systems," she said.

Other countries will likely use the taxonomy as a starting point and adapt them to their needs, Reynolds said. For example, Canada and Australia, which are both looking at ways of making their economies more sustainable, might fine-tune the taxonomy to help them deal with their large fossil fuel industries, she added.

U.S. Securities and Exchange Commission's Robert Jackson Jr. had earlier told the conference that the U.S. may need to create its own classification system to make sure investment funds take a standardized approach to ESG criteria.

Engagement vs. exclusion

Jackson also made the point that ESG funds have frequently voted against ESG proposals made by investors.

Reynolds said she believed shareholders should make use of their voting rights, but noted that different funds had different practices. Some favor engagement with a company, and trying to persuade it to change policies over the longer term, while others favor using shareholder votes to make their message known.

Some shareholders have a valid reason for not voting in favor of a shareholder proposal because they may come from what they determine is a fringe group, she said.

With regards to investment policies generally, Reynolds is more in favor of investors trying to persuade a company to change its policies — for example, by getting a fossil fuel company to lower its emissions, rather than forcing a fund sell off shares.

Meaningful engagement with clear objectives "can be extremely powerful," she said. More extreme action has a role to play if a company refuses to change and presents a threat to investors' portfolios, she said.

Reynolds also said passive funds, which aim to maximize returns with a minimum of trading, need to pay more attention to ESG concerns.

"They need to care more because they are invested across the whole economy so they need to understand that things like climate change and sustainability issues are going to affect all the companies in the portfolio," she said.

Investor awareness of sustainable finance is growing, and the PRI saw its greatest growth in the last year with an additional 453 signatories.

Latin American countries such as Chile have begun taking a greater interest in the issue, as has China, she said. The PRI expects additional growth from the Middle East whereas interest in incorporating ESG practices into investments grows.