European Commission’s Technical Expert Group on Sustainable Finance launches reports, including on an EU Taxonomy, to help drive the transition towards a sustainable economy

18 June 2019

Image: TEG

On 18 June 2019, the European Commission’s EU Technical Expert Group on Sustainable Finance (TEG) launched reports on an EU Taxonomy, a voluntary EU Green Bond Standard and voluntary low-carbon benchmarks. The TEG’s reports will help shape future regulations, some of which are still under negotiation.

UNEP FI welcomes these reports and commends the TEG on its progress. These reports mark a milestone in the Commission’s ambition to make the financial sector a powerful actor in fighting climate change and meeting the sustainable development goals (SDGs) by further aligning the industry with the Paris Agreement and the UN 2030 Agenda for Sustainable Development.

Meeting the SDGs and Paris Agreement commitments requires large-scale business and infrastructure solutions, which in turn require financing from mainstream commercial and financial institutions.

As our work on Fiduciary Duty in the 21st Century has shown, decisions made by fiduciaries cascade down the investment chain affecting decision-making processes, ownership practices, and ultimately, the way in which companies are managed.

Understanding impacts, which UNEP FI espouses through our Principles for Positive Impact Finance, is key to growing the volume of sustainable finance, and addressing the trillion-dollar SDG financing challenge and the Paris Agreement commitments.

If the endgame is a sustainable economy, then the required magnitude of investment means that private capital – beyond what governments can contribute – will be essential.

EU Action Plan

The EU is committed to ambitious climate and energy targets for 2030 in line with the UN 2030 Agenda, the Sustainable Development Goals (SDGs) and the Paris Agreement. In its long-term strategy, the EU strives for net-zero GHG emissions target by 2050[1]. The yearly investment gap to meet the European climate mitigation targets alone is estimated between € 175 to 290 billion.

The EU Action Plan on financing sustainable growth contains 10 actions, some of which have led to political agreements already. In July 2018, the European Commission set up a Technical Expert Group (TEG) to assist it in developing:

  1. An EU classification system – the so-called Taxonomy – to determine whether an economic activity is environmentally sustainable
  2. An EU Green Bond Standard
  3. Benchmarks for low-carbon investment strategies
  4. Guidance to improve corporate disclosures of climate-related information

The TEG is comprised of experts from finance, academia, civil society and industry, and it receives supportive input from almost 200 selected experts, including UNEP FI – an official observer in the TEG.

EU Taxonomy

Leading thinkers in the EU High-Level Expert Group on Sustainable Finance (HLEG) recommended a Taxonomy, among other actions, as a key part of deep reforms to make finance more sustainable. As a common language, the Taxonomy is an opportunity to establish useful guidance. The Taxonomy will be an important tool to help investors and other financial actors contribute to the transition to a sustainable economy and engage in a dialogue with companies.

According to the report, “A Taxonomy is a classification tool to help investors and companies make informed investment decisions on environmentally friendly economic activities. It can help to grow the clean economy of the future and substantially improve the environmental performance of industries we have today.”

By deep-diving on what it means and takes to achieve a desired environmental outcomes – or impact, in this case climate change adaptation and mitigation – the EU Taxonomy helps bring mainstream finance a step closer to impact-driven analysis, the core of what UNEP FI is driving for via its Positive Impact Initiative and Principles, albeit across the environmental, social and economic pillars of sustainable development.

Key points about the Taxonomy:

  • The EU Taxonomy is:
    • A list of economic activities and relevant criteria
    • Flexible to adapt to different investment styles and strategies
    • Based on latest scientific and industry experience
    • Dynamic, responding to changes in technology, science, new activities and data
  • The EU Taxonomy is a list of economic activities that contribute to six environmental objectives:
    1. climate change mitigation;
    2. climate change adaptation;
    3. sustainable use and protection of water and marine resources;
    4. transition to a circular economy, waste prevention and recycling;
    5. pollution prevention and control;
    6. protection of healthy ecosystems.
  • 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[2].
  • Taxonomies are used in the investment industry and are demonstrated to help drive capital towards sustainability objectives.
  • The Taxonomy will be developed gradually, starting with climate change mitigation and adaptation with this first report.

How will the Taxonomy be used?

Under the proposed Taxonomy regulation, institutional investors and asset managers marketing investment products as environmentally sustainable would need to explain whether, and how, they have used the Taxonomy criteria. They should also disclose the proportion of the underlying fund that is consistent with the Taxonomy.

Other financiers, companies and local authorities both within and outside the EU can also use the Taxonomy on a voluntary basis.

Benefits of the Taxonomy

In order for the financial sector to contribute to the sustainable transition, the robustness of its toolkit must be improved through initiatives like the TCFD and now the EU Taxonomy.

Through establishing a common language, the Taxonomy will provide clarity when discussing ‘green’, ‘responsible’, and ‘sustainable’ products and practices among financial actors as well as wider stakeholders.

In addition, the Taxonomy will also:

  • Help translate commitments to the Paris Agreement and the SDG’s for investors. The Taxonomy bridges the gap between international goals and investment practice, clearly signalling the types of activities that are consistent with the low-carbon transition, adaptation and other environmental objectives.
  • Put environmental data in context. Investors need to understand which companies are contributing to the low-carbon transition and which are building resilience to climate change, not just carbon footprints.
  • Support different investment styles and strategies. Investors marketing environmentally sustainable funds can invest in Taxonomy-eligible activities; engage companies on how they are progressing towards Taxonomy thresholds; or provide their own explanation for how they will achieve the fund’s goals. Investing in Taxonomy-eligible activities is not mandatory.
  • Save time and money for investors and issuers, by allowing investors to focus on what they do best, understanding the risk and return of an investment.
  • Avoid reputational risks. By screening out economic activities that undermine broader environmental, climate and social objectives, investors can avoid reputational risk and ensure that their strategy is robust.
  • Deepen the conversation. By focussing on economic activities, the Taxonomy provides a tool to understand company business models. Some business lines may be delivering on sustainability objectives, while others may not. This allows a sophisticated discussion around strategy and consistency with sustainability objectives.
  • Reward companies. A science and evidence-based framework to define what is environmentally sustainable provides companies with clear direction. It will help companies access finance for R&D while rewarding those undertaking environmentally sustainable activities.

Read the EC Press Release here.

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, where identified.
  • Seek additional feedback on criteria that have not yet been subject to public consultation starting early July. We’ll share more information in due time.
  • Develop further guidance on implementation and use of the Taxonomy.

UNEP FI will continue to engage as an observer on the TEG and to promote the EU Taxonomy with European investors, banks, and globally.

 

Download the EU TEG Users Summary report 2019

Download the full EU TEG Technical report 2019

 

[1] https://ec.europa.eu/clima/policies/strategies/2050_en

[2] Minimum social safeguards would apply to all Taxonomy eligible investments. For further details see the proposed Taxonomy regulation https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2017-5524115_en#pe-2018-3333

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