“Brown” Taxonomy Could Standardize Negative ESG Screening

An introduction of “unsustainable” activities list by the European Commission could standardize negative screening by investors and shift capital flows. Negative or exclusionary screening remains the most widely applied ESG strategy in the financial sector, however there is no standardized approach and in a data comparison, only half of fossil fuel companies were part of the all lists studied due to variations in data coverage.  In practice, many large investors are unlikely to make immediate changes to screen approaches, but will use these disclosures as a starting point. Brown taxonomy has gained support from financial market regulators like the ECB, Band of England, and Sweden’s Riksbank, eventually influencing the application of penal or “malus” capital charges.