The taxman cometh

It has proved torturously difficult for the European Union to define what universe of stocks and bonds can be held by the €4.6tn ($5.04tn) or so of “sustainable funds” registered in the bloc.

Frustrated asset managers pulled €175bn of funds from the greenest category after the EU told them that from January 2023 this should contain exclusively “sustainable investments”— without clearly explaining what would count as such in the eyes of regulators.

So it came as a relief to investors when the EU’s executive branch clarified last week that fund managers are broadly free to decide what counts as sustainable, and said they would be given a “safe harbour” for funds that track certain ambitious climate benchmarks.

It was seen by some as an admission that ethical decisions cannot be captured by a single legal rule book — and a welcome sign that EU authorities want to give market players the freedom to experiment with different ideas about how to participate in the green transition.

A few problems with the flagship disclosure rules remain:

1. The clarification could actually lead to more flip-flopping. Billions of euros worth of funds that track certain climate benchmarks can now switch back to the “greenest” category, known as “Article 9”, just months after ditching the label.

2. It hasn’t solved concerns over the taxonomy, a separate EU attempt to define which companies are “green”. This rulebook faced a challenge in court from activists yesterday over the inclusion of gas and nuclear.

3. And neither the EU nor the UK have yet agreed on clear labelling and naming rules for green funds — creating an unease about how to market funds.

Also today: how to persuade companies to be more transparent about tax. Patrick Temple-West and Stephen Foley report on the perspective from activist investors. And I dig into EU efforts to apply pressure through green funds. (Kenza Bryan)

PS. Join award-winning FT columnist Stephen Bush, writer of our Inside Politics newsletter, public policy editor Peter Foster and other colleagues online today as they discuss Britain’s political future. Register here for free.

ESG investors rally around tax transparency

As Simon highlighted from Davos in January, corporate elites don’t want to talk about tax payments. 

But increasingly, tiptoeing around tax bills is no longer an option for global companies. The ESG investor community is now demanding that more companies disclose their tax payments.

Last week, ExxonMobil and Chevron said they would face shareholder votes on tax transparency at their annual meetings at the end of May. A coalition of investors and activists want these companies to start country-by-country tax reporting, arguing that “tax avoidance is a key driver of inequity”.

The companies argued they provide this information confidentially to tax authorities. Releasing it publicly poses “significant risk that information could be misunderstood”, Exxon said.

But some companies have started reporting country-by-country tax payments.

Shell in 2019 said it would report its tax bills in countries when it does business. “It is more important than ever that we are open about our tax payments so that people can understand how much we pay and why,” Shell’s chief financial officer Jessica Uhl has said.

For companies reporting country-by-country tax payments, “I have not heard from them that it has had any negative impact”, Louise Schreiber, co-head sustainability research at Mirova, told us. “We will continue to support tax transparency at [company] general meetings,” she said.

Norway’s oil pension fund told us: “We consider public country-by-country reporting to be a core element of transparent corporate tax disclosure.”

The major question for these petitions is whether or not big asset managers such as BlackRock and Vanguard will vote in favour. Last year, Vanguard and BlackRock voted against similar tax transparency proposals at Cisco and Amazon.

BlackRock said last year when it voted against the Cisco tax proposal that “additional disclosure may be required in the future” but that “the company is providing a detailed disclosure of its income tax contributions in accordance with US” requirements. (Patrick Temple-West and Stephen Foley)

Asset managers should disclose tax avoidance concerns in green funds, EU authorities say

The easy way to do green investing has long been to rely on naturally low-carbon tech companies such as Meta to boost returns without too much effort.

After getting a beating last year, tech stocks have started to recover. Some funds classified as “green” under EU rules, like the cyber security ETFs offered by Rize or WisdomTree, currently hold 100 per cent of their investments in tech stocks.

But green fund managers could soon have to think a lot harder about whether it is worth holding companies whose tax scandals may overshadow any benefits from being low-carbon.

Three European supervisory authorities recommended last week that the bloc’s reporting rules for green funds, 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.

Under the proposals, fund managers would also have to disclose the proportion of employees in a company that earn a low wage relative to national benchmarks, and whether a company interferes in the formation of trade unions.

Tech groups are no stranger to tax and workers’ rights controversies. The “Silicon Six” — Amazon, Meta, Alphabet, Netflix, Apple and Microsoft — may have underpaid taxes by nearly $150bn between 2010 and 2020, according to a report by the Fair Tax Foundation campaign group.

And until a year ago, no Amazon warehouses in the US were represented by a union (only one now is). It has been accused of using controversial techniques like mandatory “captive audience” meetings to discuss anti-union themes, held during work hours.

SFDR’s renewed focus on societal issues could subtly change which stocks end up in green funds.

Funds that have a sustainable investment theme or objective under SFDR disclosure rules (leading them to be known as “Article 8” or “9” funds), are increasingly the primary vehicle of choice for retail investors interested in sustainability.

“Our evidence suggests investors are much more interested in Article 8 or 9 funds than other funds — that’s crystal clear,” Jane Ambachtsheer, BNP Paribas Asset Management’s head of sustainability, told Moral Money.

And among these investors, the appetite for addressing social issues such as tax and workers’ rights is growing, Ambachtsheer said.

The “S” is also a hot topic for Amundi, Europe’s largest asset manager. Vincent Mortier, the group’s chief investment officer, told Moral Money that institutional investors are increasingly clamouring for funds focused on the idea of a just transition — an all encompassing approach to doing no harm to workers, consumers or the planet — not just the environment. “It’s a very important topic . . . We are getting more and more requests.”

The question will be whether disclosures embarrass asset managers enough to make them jettison the worst-performing companies from green funds. This could depend on how much attention investors pay to the disclosures. Under the proposals, fund managers would also have to provide investors with a simplified “dashboard” of ESG information, which should make wading through these easier. (Kenza Bryan)

Smart read

Two major asset managers are locking horns with energy group ExxonMobil over its climate plans, our colleague Emma Dunkley reports, ahead of its annual meeting next month. One of these, the UK’s Legal and General Investment Management, said it had already divested Exxon shares from some of its funds over concerns it is failing to address climate risk.