Real estate investors face the greatest challenge in complying with the EU's incoming taxonomy rules, while asset management firms managing funds across the bloc could be forced to realign portfolio allocations to ensure compliance ahead of the 2022 deadline.
Research from Bloomberg Intelligence (BI) published today (9 February) claims managers of property funds face the poorest taxonomy scores if amendments are not made to the historic regulation as "few buildings built before 2021 would be eligible" under the legislation's criteria.
The EU's taxonomy, which will see certain disclose requirements come into force at the start of 2022, is a classification tool for environmentally sustainable activities in efforts to bring greater ESG transparency to investors.
This is the first time fund groups will be required to weigh sustainability risks alongside other financial risks before disclosing to investors how these are managed.
BI's research said real estate asset mangers may face challenges unless regulators make changes to the current standards.
It explained: "As is stands, few buildings built before 2021 would be eligible; they would have to have at least a class A energy-performance certificate, so investment in these may reduce a fund's taxonomy score and restrict taxonomy-aligned green bond issuance."
The EU's classification of environmentally sustainable activities is also "expected to increase costs for asset managers", according to BI, "as they will have to invest heavily in ESG data and research".
For firms looking to achieve higher taxonomy-related scores, the new requirements could have an impact on performance as fund managers "switch away from companies with limited data to large cap shares", it added.
"[Fund managers] may struggle to report from 1 January the degree to which their funds are taxonomy-aligned without hefty investment in ESG data and research," BI said.
"This is chiefly due to the paucity of issuer data. Companies are required to start reporting their taxonomy aligned revenue, capital expenditures and operating expenses only during 2022. A lag of even a few months could prove costly."
The report explained that asset managers may therefor need to change their asset-allocation strategies to achieve higher taxonomy aligned scores for their funds and their own businesses.
"This could restrict where they can allocate capital and change fund performance," it said.
BI expects a shift in asset allocation away from stocks where data is "patchy", thereby "giving rise to a large-cap bias" and less global diversification,
If regulators were to consider amendments to the requirements, BI senior government analyst Sarah Jane Mahmud said an exemption for ESG metrics under MiFID II research unbundling rules may leave asset managers "better positioned to report more accurate, granular information on the extent to which their funds support sustainable activities."