This series has previously looked at the , the , the potential themselves and if the taxonomy will change . This instalment asks if the rules will truly have a big impact on companies seeking capital.

“In some ways, we would hope so, because the primary purpose of the taxonomy is ultimately to influence the cost of capital, and therefore provide that incentive for companies to move towards greater investment in taxonomy-aligned activities,” said Elizabeth Gillam, head of EU government relations and public policy at Invesco, a fund firm with roughly $1.57trn in assets under management.

However, “we’re not seeing necessarily the taxonomy itself being the guiding framework, but we are seeing more generally the entire focus on climate change is starting to have an effect on on prices. So, for example, we did a piece of work, just after Cop26, looking at those price signals, and found that, as a general rule, companies that are more exposed to renewable energy are outperforming the market, whereas those companies that are exposed to fossil fuels have tended to underperform the market. And so those price signals are feeding through. I think the question is, obviously, once the taxonomy really starts hitting people, both in terms of corporate reporting, which won’t be for another couple of years, but also at the product level, do we start seeing those clear pricing signals going into the market? But I think it’s still a little bit too early for that to be the case,” Gillam said.

Sources of capital

“I think it’s too early to say,” echoed Rick Lacaille, senior investment advisor at the custody bank and financial data provider State Street. He identified two influential factors to watch. First, “if there is a dominant demand for the highest standard of sustainable green products, then that will filter its way through, little by little, into the cost of capital, particularly for companies that historically have had most of their investor base in Europe.” Yet Lacaille is “not so sure” this will ultimately make a large impact.

The second consideration is that “most of this is secondary market impact as opposed to primary market,” he said. “If we’re trying to transform the global economy to a low carbon future, the amount of new capital needed is enormous.” The transition will be driven by “companies that maybe don’t exist at all at the moment” and less by “companies that exist already,” and so the focus is misplaced. While raising the cost of capital will likely reduce harmful activities, considering the global sums involved, “it may not be large enough to really make much of a difference.”

Nuclear exposure

While nuclear might be the most radioactive bit of the taxonomy, it might also be the bit least influenced by the markets. “Today there are not many listed companies that will expose [investors] to nuclear,” observed Bruno Allain, senior research analyst, Quaero Capital, a European asset manager with €2.87bn in assets under management. Last month the French government it would inject €2.1bn into EDF, out of the €2.5bn the utility needs to raise, largely because EDF has experienced problems with nuclear power production.

“This is where the taxonomy in some ways, and how it’s planning to be used, maybe muddied the waters slightly, because it’s true that for private market investors, nuclear is not necessarily a big investable asset,” said Gillam. “It’s primarily backed by big companies, by states. But what we have seen, particularly in the EU, and which is where some of this got very political, is the EU has now tied the taxonomy to the disbursement of covid recovery funds and the EU budget. So under the rules, countries have to spend a minimum of 37% of their covid recovery money on climate friendly activities. And the closer they match the taxonomy criteria, the more that counts. So I think this is where the incentive, particularly for certain countries, to include nuclear is. It’s not about what we as Invesco or other private market actors might be doing, but it’s their ability as a state to be able to finance their nuclear industries and have access to this European level money in order to do so. And I think that’s a probably a stronger incentive to have nuclear included in the taxonomy than it is necessarily for private investors.”

“Some activities may, well, are moving into into the private market”, noted Lacaille. “But private doesn’t necessarily mean bad. I mean, it’s an important point that you don’t demonise private equity as this entity that has in a sense no scruples, no standards or anything else. And one of the reasons I say this, if you look at asset owners globally, large scale pension funds have a lot of money in private equity. And they’re asking those private equity GPs very hard ESG questions. We know that they don’t have a tradition of measuring or publishing data, but that does seem to be changing quite rapidly.”

Shifting assets into the private markets is not necessarily “a safe haven” for brown industries, he said. While there may be some buyers “who have lower standards,” not all will lower the bar. Private market funds are “changing themselves quite a lot.”

Useful as benchmark

The guidelines could be more practical as a benchmark for firms, commented Mirjam Wolfrum, director of policy engagement at CDP Europe, an NGO that runs an environmental disclosure system. “The taxonomy can act as a useful platform for engagement with companies around their sustainability performance, supporting decision making on future investment, as well as monitoring performance against existing projects against the taxonomy over time,” she told Delano.

With reporting by Marc Fassone