By Robin Hamaker-Taylor
In the years since the Paris Agreement, the European Commission has sought to create the enabling conditions for the EU to meet its targets under the Paris Agreement and goals of the 2030 Agenda for Sustainable Development. The Commission developed their Action Plan for Financing Sustainable Growth in March 2018 and established a Technical Expert Group on sustainable finance (TEG) shortly after to assist in the development of proposals which advance the action plan.
Recognising that the investment industry often uses taxonomies to drive capital towards objectives, the TEG developed the EU Sustainable Finance Taxonomy (‘the EU Taxonomy’). The EU published its Technical Report on the Taxonomy in June 2019.
Taxonomy helps translate the EU’s commitments to the Paris Agreement and the
Sustainable Development Goals (SDGs) 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.
the EU Taxonomy cover?
Taxonomy provides a common language on what constitutes sustainable
activities. It is a list of economic activities with performance criteria for
their contribution to six environmental objectives, including:
sustainable use and protection of water and marine resources;
transition to a circular economy, waste prevention and recycling;
pollution prevention and control;
protection of healthy ecosystems.
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.
the EU Taxonomy mean for adaptation?
The EU Taxonomy holds that an economic activity makes a substantial contribution to adaptation objectives if: (i) all material physical climate risks identified for the economic activity are reduced to the extent possible and on a best effort basis; and/or (ii) it reduces material physical climate risk in other economic activities. Economic activities can contribute to adaptation objectives in two different ways:
Adaptation of an economic activity: an economic activity is made more climate
resilient by integrating measures to reduce all material physical climate risks
to the extent possible and on a best effort basis; and
Adaptation by an economic activity: an economic activity contributes to
adaptation of other economic activities to physical climate risks and must also
be resilient to physical climate risks itself.
How is the EU Taxonomy useful
As set out in the TEG’s Taxonomy guidance document, a supplement to the technical report, the Taxonomy has various benefits for investors, including the following:
- Provide clarity via a common language for investors, issuers, policymakers and regulators. Investors can
use it to express their expectations for their investment decisions. Companies and
project developers can use it to plan and raise finance, developing the
pipeline of sustainable investment opportunities. All can use it to avoid
- 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.
- Save time and money for investors and issuers. The criteria have been developed by environmental and industry
experts and references the latest EU and international thinking. This allows
investors to focus on what they do best, understanding the risk and return of an
- Support different investment
styles and strategies. Investors marketing
environmentallysustainable 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.
- 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.
- 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
What’s next after the EU
Following the publication of its
Technical Report on the Taxonomy, the TEG’s mandate has been extended to the
end of 2019. The TEG is currently assessing feedback collected from July until
September 2019. They are and refining incomplete aspects of the proposed technical screening
criteria for substantial contributions and avoidance of significant harm. At
the end of its mandate, the TEG will make further recommendations to the
European Commission on the need to adjust and complement their work on an
EU taxonomy. The TEG’s recommendations are designed to support the
European Commission in the development of future regulation, as proposed in the
In October 2019, the Commission published joint statement on the International Platform on Sustainable Finance (IPSF). The IPSF is part of the European Commission’s ongoing work to support a global transition to a low-carbon, more resource-efficient and sustainable economy. It was developed, in part, to realise greater international cooperation to join up efforts to scale up environmentally sustainable finance globally and promote the integration of markets for green financial products at international scale. To this end, the IPSF will act as a forum for facilitating exchanges and, where relevant, coordinating efforts on initiatives and approaches to environmentally sustainable finance, while respecting national and regional contexts. It remains to be seen how the EU Taxonomy will align or integrate with the platform, though this should be clarified in the coming months.