Green funds facing greater scrutiny from EU

Green fund managers could face regulatory pressure to reassess investments in companies caught up in tax scandals, even when they meet environmental standards.

The Financial Times reports that three European Union supervisory authorities have recommended that the bloc’s flagship reporting rules, known as the Sustainable Finance Disclosure Regulation, should be broadened to make asset managers disclose how much of an investee company’s earnings are reported in tax havens.

According to BNP Paribas the EU’s Sustainable Finance Disclosure Regulation (SFDR) is part of the European Commission’s action plan on financing sustainable growth. It aims to provide greater transparency on the degree of sustainability of financial products to channel private investment towards sustainable investments. Some of the taxonomy requirements will also help to achieve this purpose by requiring those financial products to disclose to what extent they invest in environmentally sustainable economic activities. The phase-in implementation of SFDR started from 10 March 2021.

The FT says that UK asset managers have £177bn of funds under management that are subject to EU green disclosure rules, out of £520bn of mutual funds and exchange traded funds they manage in the EU and UK.

Under EU proposals, alongside the planned tax disclosures, fund managers would have to disclose the proportion of employees in an investee company that earn a low wage, and whether management interferes in formation of trade unions.

Funds investing in tech might be put under particular pressure by the tax plans because leading tech giants are highly profitable and have openly been booking profits in low-tax jurisdictions.

Green funds have favoured tech because low-carbon tech companies such as Meta have offered financial growth with a small environmental footprint.

But some funds classified as “green” under EU rules and available in the UK currently hold 100 per cent of their investments in tech stocks, according to data provider Morningstar.

The FT reports that, “Tech giants are no stranger to tax controversies. The “Silicon Six” – Amazon, Facebook, now owned by Meta, Alphabet, Netflix, Apple and Microsoft – may have underpaid taxes by nearly $150b between 2010 and 2020, according to a 2021 report by the Fair Tax Foundation campaign group.

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