EU Taxonomy: Platform for mainstreaming green finance: Procurement list to help drive the transition to a low carbon economy

Green light to green investment: EU sends the signal: Opportunities as market leaders seek best practice and look to zero carbon  

Photo: Climate Bonds

“The EU Taxonomy represents one of the single largest steps yet in reorienting basic economic activity towards low carbon. It will help bridge that gap between climate ambition and real economy investment that has been increasingly visible since the Paris Agreement.”

Sean Kidney 

Today’s Announcement

With the launch of today’s reports on an EU Taxonomy, a voluntary EU Green Bond Standard and the voluntary low-carbon benchmarks, the EU Technical Expert Group (TEG) has opened new pathways for a sustained increase in green investment into the 2020s and address the need to attract the hundreds of billions in private capital needed annually to meet climate and sustainability goals. 

The reports, a key part of EU Action Plan on Sustainable Finance, will become the basis for development of new regulatory frameworks for the financial sector. 

The European Commission has also announced that TCFD responses will be part of the reporting guidelines for the large listed European companies. 

How did we get here? Faster than many thought possible

Formed in December 2016, the ground breaking EU HLEG (High-Level Expert Group) overcame some initial scepticism over its accelerated development timetable, releasing an Interim Report in July 2017 and the seminal Financing a Sustainable European Economy final report in January 2018.  

HLEG recommendations formed the basis of the action plan on sustainable finance of March 2018 and in May 2018 the Technical Expert Group (TEG) was established. 

What has followed since December 2016 have been two major enquiries, myriad submissions, extensive stakeholder consultations, and reports leading to action in the space of just two and a half years.

The HLEG/TEG process has also spawned a host of similar activities: the UK’s Green Finance Taskforce, Canada’s Expert Panel on Sustainable Finance, and now the finance sector in Australia launching the Australian Sustainable Finance Initiative (ASFI), all are examining changes to domestic financial systems.  

Taxonomy in Focus 

The EU Taxonomy, modelled similarly to the Climate Bonds Taxonomy, is a procurement list for identifying and shaping green economic activities that will help meet and contribute to six environmental objectives.

These objectives are the following: 

i. climate change mitigation;

ii. climate change adaptation;

iii. sustainable use and protection of water and marine resources;

iv. transition to a circular economy, waste prevention and recycling;

v. pollution prevention and control;

vi. protection of healthy ecosystems.

It is based on two overarching principles of Substantial Contribution and Do No Significant Harm (DNSH). That is, to be included in the proposed EU Taxonomy, an economic activity must contribute substantially to at least one environmental objective and do no significant harm to the other five, as well as meet minimum social safeguards.

It defines economic activities across multiple sectors that meet climate change mitigation and adaptation objectives of the EU, covering:

-          Manufacturing

-          Agriculture

-          Transport

-          Buildings

-          Electricity generation

-          Water and waste

-          Information and Communication Technologies

More activities will be added in the future, including activities that contribute significantly to above environmental objectives.

A need for the Taxonomy

The need for standards and unified definitions has been an obstacle for green growth. Climate Bonds has been addressing the need for standards and unified definitions via its global Standards and Certification Scheme. Since 2013 the Climate Bonds Taxonomy has undergone continued refinement and development in defining sectors and areas of green activity for investors. 

The new EU Taxonomy builds on these foundations and is modelled similarly to the Climate Bonds Taxonomy. It has enlarged the number of sectors for which specific benchmarks are available to support procurement complementing the criteria set by Climate Bonds. It provides an effective classification tool to help both investors and companies identify environmentally friendly activities. The work of the TEG will also help contribute to better climate risk disclosure. 

Sean Kidney, CEO Climate Bonds Initiative: 

“The EU Taxonomy represents one of the single largest steps yet in reorienting basic economic activity towards low carbon. It will help bridge that gap between climate ambition and real economy investment that has been increasingly visible since the Paris Agreement.”

“The Technical Expert Group is working to engineer a sustained increase in green investment into the 2020s, to mainstream low carbon directions into real economy investment, infrastructure finance and capital allocation.”

“We’re in a climate investment race, to attract the hundreds of billions in private capital needed annually to meet climate and sustainability goals. The EU Taxonomy will clarify what needs to be done and make it easier for investors and banks to grow sustainable finance markets in Europe.”

“Investors and companies can now act with increasing confidence, within a common structure of information and reporting, to identify environmentally friendly economic activities. Asset owners and managers can act decisively to significantly increase the proportion of sustainable activities across their portfolios.”

Key recommendations

1. The report sets out the basis for a future EU Taxonomy in law. Investors and other potential users of the EU Taxonomy can already start to understand the implications of the it. The report contains:  

  • Technical screening criteria for 67 activities which can make a substantial contribution to climate change mitigation objectives. Almost all have also been assessed for significant harm to other environmental objectives. 
  • A methodology and worked examples for evaluating substantial contribution to climate change adaptation.
  • Guidance and case studies for investors preparing to use the EU Taxonomy. 

2. Consistent with the Mandate of the TEG, the EU Taxonomy recommendations:

  • Identify potential contributions to each environmental objective over the short and long-term. 
  • Specify minimum requirements to avoid significant harm to other objectives. 
  • Build, in many cases, on Union labelling and certification schemes, methodologies or regulations, as well as well-established market Taxonomies. 
  • Are based on conclusive scientific evidence, high quality research and market experience. 
  • Consider the lifecycle of an economic activity.  
  • Aim to adopt technology neutral approach.

The EU Taxonomy also supports brown-to-green action by: 

  • Including economic sectors and activities that are not already low carbon to provide a path towards and incentivise their substantial contribution to mitigation objectives. 
  • Focusing on classifying economic activities and not investable entities, the Taxonomy can be used by any organisation to specify the proportion of its activities that substantially contribute to environmental objectives

3. The TEG considers three kinds of activity that can make a substantial contribution to climate change mitigation. These are:

  • Activities that are already low carbon. These activities are already compatible with a 2050 net zero carbon economy. Examples include zero emissions transport, near to zero carbon electricity generation and afforestation. 
  • Activities that contribute to a transition to a zero net emissions economy in 2050 but are not currently operating at that level. Examples include electricity generation <100g CO2/kWh or cars with emissions below 50g CO2/km.
  • Activities that enable those above. For example, manufacturing of wind turbines or installation of highly efficient boilers.

The next steps 

The TEG’s mandate has been extended until the end of the year. It will use this time to:

  • Refine and further develop some incomplete aspects of the proposed technical screening criteria for substantial contributions and avoidance of significant harm.
  • Seek additional feedback on criteria that have not yet been subject to public consultation (the TEG will launch a call for feedback by early July).
  • Develop further guidance on implementation and use of the Taxonomy.

TEG’s recommendations are designed to support a proposed Delegated Act, to be developed by the European Commission. 

The Last Word on Green? - Not Quite Yet 

In keeping with Climate Bonds long term commitment to mobilising financial markets towards green solutions - assessed against the latest climate science, we’ll continue our green definitional programme integrating additional adaptation and resilience (AREG) factors in existing and new Criteria and maintaining the rigour of our Criteria thresholds. 

Investors wanting to support fast movers towards zero carbon business models and accelerate the decarbonisation of their portfolios will continue to seek Climate Bonds Certified investments, representing science-based best practice in the market. 

Green debt issuers will continue to offer Climate Bonds Certified investments to widen and solidify investor support. 

Given the close association between the EU Taxonomy and the Climate Bonds Taxonomy, the impetus towards a higher bar will be attractive to transition leaders.     

EU Climate Leadership 

The trio of announcements made today are more than simply improved guidance to the market. 

In part, they represent long sought policy goals of Climate Bonds: to have regulatory support for the clean economy of the future. To develop the frameworks and structures that encourage investors and corporations in sector by sector brown-to-green transition, and, increasingly align future investment towards NDC objectives, associated SDG outcomes and a Net Zero world. 

The EU has done just that, taking the lead role in harmonisation on green definitions in core economic sectors. 

The scope for green bonds, green loans, green securitisations and green equity investments is being expanded across one of the world’s largest financial and trading blocs. The signal to other jurisdictions, to global banking and finance and to the world’s 100+ largest emitters is unmistakeable. 

Climate Bonds welcomes this bold new platform being established today. We’ll continue to contribute and build on the work. 

Look for some unpacking of todays’ announcements in special Blog Posts over the next few weeks, exploring the interaction between the TEG features and markets and looking at some of the commentary already emerging around TEG proposals.

Into the 2020s

The climate investment race is on, with not much leeway for breaks. The EU is redesigning some of the basic rules of the race, an enormous task that representatives on the HLEG and TEG have undertaken with gusto. 

They deserve our plaudits. 

Meanwhile, the need for speed remains. Green trillions into the 2020s. 

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