We don’t need regulations for green and sustainable investing – this is what Andreas Utermann, then Chief Executive Officer (CEO) of Allianz Global Investors (AGI), said in an interview with this newspaper exactly five years ago. He sparked a lively debate at the International Capital Market Association Green Bond and Social Bond Principles Conference, which was held in Frankfurt for the first time in 2019.
At the time, the EU taxonomy was in preparation, and Utermann was concerned that European legislators might restrict the opportunities for the European asset management industry to do its job to the best of its ability for a wide range of investors. Basically, exactly what Utermann feared has now materialised. Five years later, this very problem is on the agenda at ICMA. Does the taxonomy go too far, and hinder green investing? This is the question that many market players in the field of green and sustainable finance are currently asking themselves.
Let’s get one thing straight from the start. As a fundamental approach, the taxonomy should not be rejected per se, or criticised in every single aspect that it regulates for green, social and sustainable or sustainability-linked investments. What is the basic idea that it is actually pursuing or, in the opinion of investors, should be pursuing? There are essentially two interrelated points. It is to avoid greenwashing scandals, by preventing someone from simply rebranding a bond as green, deceiving investors into thinking that their money will actually be invested to benefit climate and environmental protection. The second point follows directly, that the taxonomy defines what can and cannot be considered a green/sustainable project. That is a good thing in itself.
Obsessive over-regulation?
However, the EU taxonomy has raised eyebrows across the finance industry, being viewed as obsessive over-regulation – a corset that is simply too rigid and ultimately excludes too many green projects, killing off investment opportunities. Many market participants now view the taxonomy more as a brake than a catalyst. This became all too clear in the discussions at this year’s ICMA annual conference in Brussels. The regulations simply go too far and too deep for many market participants.
And the criticism is not entirely unjustified, if you look at the development of the market. ICMA developed the Green Bond and Social Bond Principles with market participants long before the EU taxonomy, and later drafted the Sustainability Bond Guidelines. These are voluntary guidelines for bond issuers, and the market has developed into a multi-trillion dollar asset class on the basis of these voluntary market standards. Alongside these, many see the EU taxonomy as an additional complication for investors.
Some people simply want more laissez faire, and the have an argument. Hundreds of billions, and even trillions, of euros need to be mobilised for climate and environmental protection. These projects are urgently needed to protect humanity and future generations. The capital market naturally has a significant role to play in mobilising this funding. If rules and regulations are too strict, going down to the last detail, this can be counterproductive, stopping the capital market from fulfiling its role in the allocation of capital. A little less regulation – and therefore more freedom to achieve green and sustainable goals is good for market participants – and for the climate.