EU Taxonomy legislation could make 2020 the year of the ‘green bull’ market

By Andrew Adie

One of the great challenges facing those trying to drive through sustainable investments is the issue of measurement and comparison across holdings.  However, this month the EU is due to formally adopt new green investment rules, known as Taxonomy, which will, for the first time, provide a universal system for classifying sustainable investments.

The rules are designed to stop ‘greenwashing’ by providing an independent criteria that gives investors a yard-stick by which to measure whether a company, project or investment product meets minimum sustainability standards.

The EU has yet to agree what this Taxonomy standard will look like, but the ratification of the agreement will accelerate a process towards a more standardised model for sustainable investing.

The EU’s aim is to create a level-playing field that eliminates ‘puff’ around green investments and sustainable business and instead roots investment decisions in a more objective measure of ‘fact’ based on analysing and classifying the sustainability claims being made by companies.

While the new rules will be welcomed by many, not least because they are the first international, legally-based standard for measuring sustainable behaviour, they may also bring some unintended consequences.

As investment funds look to place more money into sustainable assets, those companies that meet Taxonomy rules are likely to see their share prices rising. Green indexes, pension funds and other institutional investors that claim to consider social purpose will feel obliged to reflect Taxonomy categorisation in their investment criteria and buying decisions.

As a result, firms that meet Taxonomy rules are likely to see greater demand for their shares, and those that do not could see investors selling out.

Equally, Taxonomy could prompt the rise of ‘green bull’ investors. If a business has yet to meet Taxonomy criteria yet looks set to do so, you would think that bull investors would pile in as they anticipate share price rises when Taxonomy thresholds are met (as Institutional investors would feel obliged to buy up the stock). Conversely those firms that have made a big play of their green credentials yet look under pressure when it comes to meeting Taxonomy criteria are likely to see a fall in their share price as institutions and retail investors question the long-term plan and vision for the business.

While the Taxonomy classification is due to be ratified this month, its not until December that the rules are expected to come into force. Given that this timing coincides with COP 26, in Glasgow, we can expect Taxonomy and the sustainability profile of businesses to come into the centre of the spotlight towards the end of this year.

For sustainability and communications teams that means around 10-months of intense work lie ahead to redefine a sustainability narrative and to plan and prepare for the introduction of the new Taxonomy regime.

While Taxonomy will not in itself change the direction of travel towards more sustainable business behaviour, it is an important milestone. We can expect to see headlines focusing on companies that are exposed as having indulged in greenwashing. We can also expect to see share price rises and falls for firms that achieve, and fail to meet, Taxonomy classifications.

In time we will also see increasing investor debate and analysis of Taxonomy and whether it provides a useful benchmark that helps investors identify those firms that will sustain and prosper into the future.

As the UK focuses on Brexit we should not ignore the impact that EU legislation such as Taxonomy will have on UK domiciled businesses and investors.

The green agenda has gained unstoppable momentum, carbon neutrality by 2050 is a set target for the EU and UK and Taxonomy will be an important piece of the jigsaw in helping the commercial world categorise how it engages, invests and classifies its performance against environmental criteria.

Corporates have until December this year to bench test their sustainability narrative against likely Taxonomy criteria and to plan for a world where they will be judged against a new set of rules.

Failure will directly hit share prices and the executive bonuses that are linked to this. However, at a time when the public eye is on sustainability, those firms that fail to consider the wider implications will increase their reputational risk profile.  The time to act is now.

Andrew Adie heads the ESG team at Newgate Communications