|Name||responsAbility Investments AG|
|Signatory type||Asset manager|
|Region of operation||Emerging markets / developing countries|
|Assets under management||USD$3.5bn|
|COVERED IN THIS CASE STUDY|
|Asset class||Private debt|
|Geography||Global, only non-EU countries|
|Sector||Energy, finance and agriculture|
|Economic activity||Financial, agricultural and energy related sectors|
We view the EU taxonomy as a vital instrument that will prevent greenwashing and facilitate the financial sector to align with the commitments of the Paris agreement. However, as the taxonomy does not clearly outline criteria for countries outside the EU, implementation is challenging for investments in emerging markets. Nevertheless, we have used it to demonstrate that a number of responsAbility’s investments are environmentally sustainable.
Other aspect you would like to mention?
We selected a number of loans to companies, which in turn provide loans to local projects, all with the objective of contributing to climate change mitigation (e.g. renewable energy projects and energy efficiency projects in industry, agriculture, etc.).
Principles, criteria, thresholds
We screened selected companies and projects against the NACE sectors outlined in the taxonomy framework. We then screened these companies against the “Substantially Contribute to Climate Change Mitigation” criteria, specified for those NACE sectors. We scrutinized all sub-loans made by responsAbility’s selected companies, though we could not allocate all the companies to the sectors/categories outlined in the Technical Annex. An example is an investment provided for an energy efficient machine/system for an agricultural company. The technical annex only refers to systemic change for agricultural companies (and not individual installations, such as this energy efficient machine/system). As the EU has indicated that such cases will be covered in later versions of the taxonomy, we have assumed such loans were compliant with the taxonomy.
Do no significant harm assessment
We identified do no significant harm (DNSH) for investments outside the EU. As the current technical annex outlining DNSH requirements mainly refers to EU legislation, this was challenging. We identified the relevant criteria by leveraging advice from experts and from the Technical Expert Group (TEG) itself. We then screened eligible investments (investments contributing significantly to climate change mitigation) against the DNSH criteria, using data from our ESG assessments (based on the International Finance Corporation (IFC) Performance Standards and applicable laws and regulation) to determine compliance with DNSH criteria. We were unable to qualify some loans as compliant as the IFC Performance Standards do not cover the same requirements as those outlined in the DNSH section of the taxonomy.
However, we did identify loans that were compliant with the DNSH criteria.
Social safeguards assessments
We screened eligible investments – those that substantially contribute to climate change mitigation and were compliant with DNSH criteria – against the social safeguards.
As investee companies were not multinationals, the ‘OECD guidelines for multinational enterprises’ was not applicable. Therefore, we screened companies against the UN Guiding Principles on Human Rights and the ILO main conventions. The UN Guiding Principles state that companies must have a specific policy on human rights, which is not the case for some of the investee companies. However, our ESG assessments confirmed that these companies respect human rights as well as the ILO main conventions, so we assumed that they were compliant with the social safeguards.
We screened against the taxonomy for all loans included in our case study. This process was simple to implement once we had screened investments against the substantially contribute to climate change mitigation, DNSH and social safeguards criteria.
We calculated taxonomy alignment as 76% (see illustration below).
As responsAbility only invests in non-listed companies in emerging markets, we relied on ESG data to determine whether investments aligned with the taxonomy. We were not able to use external databases to confirm compliance for our financial products, so screening against the taxonomy was a time-consuming and complicated process.
However, where other Development Finance Institutions (DFIs) or International Finance Institutions (IFIs) have invested, there is significant potential to collaborate on taxonomy screening and improve investee’s performance to further comply with taxonomy requirements (mainly for the DNSH and social safeguarding assessments).
Sustainability is at the core of everything responsAbility does so we see the taxonomy’s definition of sustainable investment as a great opportunity to foster investments that mitigate climate change. However, as an asset manager based in the EU but exclusively active in emerging markets/developing countries that do not adhere to EU legislation, we found it challenging to demonstrate that a few our investments are environmentally sustainable when applying the EU taxonomy.
For a number of screened projects, it was not possible to meet DNSH criteria, as certain elements did not adhere to the EU legislation/DNSH criteria. For example, some renewable energy projects insist that a water management plan is developed in collaboration with stakeholders (EU taxonomy criteria). Water management plans that exist for many of responsAbility’s projects are compliant with local regulations and IFC Performance Standards and our ESG assessments show that the projects are not doing any significant harm to the environment. However, DNSH criteria were not met, as water plans had not been developed with stakeholders, though we assumed that the investments did no harm to any of the environmental objectives and complied with the UN Guiding Principles on Human Rights.
Despite the challenges to implement DNSH criteria for companies outside the EU, it is possible for responsAbility to be compliant with the taxonomy, so we believe disclosing against the taxonomy is highly relevant to our business.
Example of how the EU taxonomy has been screened against a number of responsAbility investments:
Challenges and solutions
|1||Identifying DNSH criteria applicable for investments outside the EU||Sought advice from taxonomy experts|
|2||Access to data. As responsAbility cannot rely on external data, we must collect data ourselves, which is time-consuming.||Relied on our own data collection and ESG assessments|
|3||DNSH criteria differs from the criteria outlined in IFC Performance Standards||We applied IFC Performance Standards criteria for ESG assessments. We spent considerable time identifying aspects of IFC Performance Standards that are not aligned with DNSH criteria.|
Start early, as implementing the taxonomy is a time-consuming process. Collaboration with other investors investing in the same companies will reduce both investors and investee companies’ workload and will make the implementation process faster. Ensure management teams are aware of this new regulation, so sufficient resources are allocated to implementation. Though companies may well be in compliance with applicable laws and regulations, it cannot be assumed that they also meet DNSH criteria, so it is advisable to identify DNSH criteria and screen against them at company level.