‘Fundamental flaw’ in centralised EU taxonomy approach

Written by Sophie Smith

28/03/2023

The EU taxonomy could have a fundamental flaw in its centralised approach, WHEB Asset Management has said, arguing that the UK's proposed approach could work "much better".

Speaking at the Sustainable Investment Summit, WHEB Asset Management managing director, George Latham, noted that the taxonomy is "already over a thousand pages long", warning that trying to cover all potential options could be too difficult.

He stated: "There's the second part of the Sustainable Finance Disclosure Regulation (SFDR) in Europe, which is not fully in yet, which is the taxonomy.

"I think there is a fundamental flaw in the design in that it is a centralised body trying to define every investment that is sustainable or every activity that is sustainable.

"Even in the wind industry, they can get the whole thing, but they can’t get the gearbox or the blade or some of the actual components in the value chain because it’s just too complicated.

"This area is rapidly evolving and so that centralised, bureaucratic approach was never going to work well."

In contrast, however, Latham suggested that the UK's approach as currently proposed will be "much better", although it may bring more short-term pain for the industry.

"It's going to create some real challenges in the sector because the bar overall is much higher and so there is going to be some pain where a number of people are going to drop out of any kind of labelling," he explained.

More broadly, Latham also stated that whilst SFDR's are "great on some levels", having prompted improvements in disclosure requirements and pushed companies to think about what they are doing and how they explain this to savers, the standards were not well understood when first introduced.

In particular, Latham argued that the hierarchal structure, with Article 9 viewed as the "most intense", prompted some companies to aim for the top of the hierarchy, "without really understanding the implications".

"So as the disclosure requirements and the and the overall requirements that become clearer they have had to come back and review that," he stated.

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