Some financial institutions have already forked out “several million pounds” on the European Union’s green taxonomy, while others are footing major annual legal and staffing bills, according to research from the UK government.
Analysis undertaken last year on behalf of the UK’s Department for Business and Trade has just been published, and shows the costs and benefits of disclosure against the European framework, which the UK is currently considering replicating.
Costs
Interviews with financial institutions including asset managers and owners found staffing to be the biggest cost driver. It’s common, according to the study, to have between 15 and 30 people working on the EU Taxonomy, although these are not all full-time members of staff.
Financial institutions are more likely than real-economy companies to have already updated their data systems to account for the taxonomy, with some interviewees saying it had cost their entities “several million pounds” to do so.
“Financial institutions also purchase datasets from major third-party data providers and estimate that contracts are £100,000s annually for each provider,” said the report, noting that many had numerous such contracts in place.
Legal costs were raised by some financial institutions as a big issue, with “several report[ing] costs of several hundred thousand pounds per year”.
For private market investors, it was consultancy services that drove up bills, because many of their underlying companies aren’t covered by the Taxonomy Regulation and therefore don’t disclose the relevant data themselves.
“One investor reported that for an investment in a single geographic location to be assessed, the costs would start at £10,000 and would scale from there, noting that ‘there is very little economy of scale because of the granular requirements’.” said the report.
“Another private market investor reported using a Big Four consultancy at a discounted rate because it was provided through an initiative as a pilot for two portfolio companies,” it continued.
“They reported that it took a month to assess their alignment level. Outside of pilot pricing, it would typically be £120,000 for a typical company that they invest in for the first two objectives.”
Benefits
The biggest benefit identified for the EU’s taxonomy was its ability to clarify what credible green activities are, particularly for investors in the green bond market.
One large asset manager described it as “perhaps the only standard that defines what good looks like across different sectors” while others said it can help identify companies that were successfully decarbonising and therefore likely to be better investments.
“This is not done for the reporting process,” one national investment fund was quoted as saying during the interviews. “It is done for strategy purposes and guidance.”
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