This series has previously looked at the controversy surrounding and the risk that the way the rules are written could . This instalment examines the potential impact of the taxonomy on portfolios and operations at fund firms.

The investment industry professionals that Delano spoke with had clearly been considering how to reshuffle or reshape product lineups, procedures and distribution, yet none outlined specifically what changes were in store.

No immediate adjustments

DWS Group, a German fund firm with €928bn in assets under management, said it was premature to predict any portfolio or product refreshes. The firm’s global head of ESG advisory, Dennis Hänsel, told Delano: “DWS currently excludes companies that generate more than five percent of revenues from nuclear power from its dedicated active ESG mutual fund strategies. We will review the taxonomy decisions and make the necessary adjustments to our funds. However, we cannot say anything about the specific design of these changes at the moment. We would wish that in Germany we would continue on the path we have been pursuing towards renewable energies. However, it is to be feared that investors from less nuclear-critical countries could, with reference to the new EU taxonomy, increasingly want ESG funds from providers that include securities from nuclear power operators.”

Asked if the firm anticipated having to switch marketing or distribution strategies and what impact any adjustments would have on operating costs, Hänsel stated: “Unfortunately, it is too early to comment on these topics.”

“The first impact is that it has created discussions with investors that are very interesting,” observed Bruno Allain, senior research analyst at Quaero Capital, a European asset manager with €2.87bn in assets under management. “This has opened up a whole number of debates. Very clearly for the moment it has not changed anything about management.”

Preparing for product changes

“I wouldn’t say that the taxonomy itself is reshaping our product lineup,” reported Elizabeth Gillam, head of EU government relations and public policy at Invesco, a fund firm with roughly $1.57trn in assets under management. “Client demand is obviously driving a lot of the new developments in our product range. We have been launching increasing numbers of ESG, but also net zero and climate-focused, products. Obviously, we’re mindful of the evolution of the taxonomy, notably that those products that do have this climate objective or environmental objective will have to report against the taxonomy. And that’s something that our clients will be looking at. We think it’s too early to really be embedding the taxonomy in our investment process, given the lack of data and lack of reliable data. That won’t be coming through for another couple of years. But it’s something that we’re very mindful of, and we’re looking very closely at how in the future we might move to align our existing products, or indeed create new products that would that would be able to deliver those taxonomy solutions to clients who want them.”

Distribution partners

Gillam indicated that Invesco had no immediate plans to modify its approach to distribution either. Right now “what we’re trying to understand is how our existing distributors are thinking about these rules, and what the consequences of that are on us.”

However, it is likely that partners will seek new products as demand evolves, she said. As the current set of fresh regulations requirements--the taxonomy along with the and the Mifid revamp--filter out into the market, “that might trigger” distribution partners to reflect on “how their product shelves map against those different product categories. So that if a client does come to them and says, ‘I specifically want a product in this category’, they have the solutions to respond to that.”

Private market funds are facing a distinct set of challenges, according to , partner and ESG services leader at the consulting firm EY in Luxembourg. Shortly before speaking with Delano, Müller said she “was in discussion with an alternative player who said that the regulation is designed for Ucits and that for the alternative market, it’s a bit more difficult to grasp, at least to concretely understand how they can apply this to the underlying investments.” Real estate and infrastructure funds have a fairly good sense of which types of assets “have a positive impact”. That contrasts with “sectors like private debt, where it’s a bit more difficult to understand how you can contribute, actually.”

For all funds, Müller said, “there’s a lot of line by line, manual work to be done for now. This is going to evolve, but that’s a bit the difficulty. It’s time consuming. The content is complex. You don’t have so many specialists, internally or even on the market. It’s not always easy to find the responses.”

In other words, firms are tackling the taxonomy as best they can.

With reporting by Marc Fassone