TEG taxonomy report tees up ‘common language’

Stakeholders have largely welcomed the release of long-awaited green EU taxonomy proposals, which attempt to lay down green criteria to support sustainable finance, but opinions were divided over the extent to which weaknesses in the first draft had been addressed.

More than 600 pages of documents were published on Tuesday as part of the Commission’s sustainable finance action plan, representing the views of the Technical Expert Group (TEG), which commenced its work in July 2018. The taxonomy marks the first formal attempt by the EU to establish what economic activities can be considered “environmentally sustainable” by unifying different standards in the industry and issuing step-by-step guidelines to investors for aligning green portfolios.

“Today we’re taking another important step towards a more sustainable Europe,” said Valdis Dombrovskis, Commission vice president, at the Brussels Economic Forum on Tuesday. “It will provide a toolbox for companies and investors, in order to guide their sustainable investment decisions.”

In the report, which aims to lay the foundations for an EU taxonomy in legislation, the TEG identified three types of activities that make “a significant contribution to climate change mitigation”:

  • Low-carbon activities that are already compatible with a net-zero carbon economy, such as zero emissions transport (e.g. battery electric vehicles) and electricity generation.
  • Transition activities that are not currently operating at a zero emission level, such as low emission cars.
  • Enabling activities that make a significant contribution to the activities above, such as manufacture of wind turbines, or the installation of highly efficient boilers.

For the full report, see the European Commission website.

Many stakeholders welcomed the proposals as a step in the right direction towards the mainstreaming of sustainable finance.

Sean Kidney, CEO at the Climate Bonds Initiative and TEG member, said “the taxonomy is about what we have to do to address climate change, that’s what’s important about this”.

“We’re still making investments in society which are simply wrong,” he told Sustainabonds. “These things are the exact opposite of what we have to do at a time when our very existence is hanging by a thread because of the severe climate change coming towards us. If your investments are not on the list, then you should take a good hard look at whether what you’re doing is contributing.”

“The TEG has dramatically expanded the potential pool of green bond issuers, green finance players and disclosures that can be made by banks and investment managers,” he added. “Most people have not realised how broad the transition to a low carbon economy is and needs to be – this will lead to the significantly increased issuance of green bonds.”

But while many are enthused by the taxonomy’s potential to bolster sustainable investments, others have raised concern over its methodology, asking whether labelling something as “sustainable or not” is the right approach, suggesting rather that a more graduated approach and one that could accommodate a transition process would be more suitable.

In December 2018, after the TEG issued its first taxonomy draft and requested feedback on its usability, several stakeholders expressed concern that too many green bonds would fall foul of the proposed thresholds. Cicero, for example, said that depending on how the approach was implemented, some two-thirds of green bond frameworks they had reviewed would probably fall foul of the binary approach of the proposals and new issuers could be deterred from entering the market.

ICMA, which was a TEG member, said the new reports had taken on board market and stakeholder feedback and identified issues relating to “criteria seen as potentially too binary” and “lack of clarity on how transition and impact would be taken into account”.

However, Christa Clapp, research director at Cicero, told Sustainabonds that its overarching concerns remain.

“It’s still going to discourage some new issuers from coming to the market,” she said.

“We’re missing out part of the green transition if we’re creating such a detailed burden of compliance.”

Last week, Nathan Fabian, Rapporteur for the TEG subgroup on taxonomy, was keen to address such concerns.

“I promise you it’s not big evil bears waiting around dark corners to take away the market,” he said, speaking at at the 2019 Green Bond Principles & Social Bond Principles conference in Frankfurt.

“It’s not mandatory to invest [in the taxonomy]; it’s a disclosure requirement,” he added. I don’t think any member state in Europe would allow such a regulation to pass and I don’t think the Commission would either. What is anticipated is a tool that can help inform and be used as a common language.”

Although the taxonomy would be voluntary, Clapp said the interpretation of this was nevertheless “a tricky area”.

“Some of the language which is in the document encouraging the global use of the standard and around compliance and verification imply a future path to something that is more than voluntary,” she said.

The TEG’s mandate has been extended to the end of year. It has launched a call for further feedback to develop further guidance on implementation and use of the taxonomy.

“It’s an ongoing job”, said Kidney. “There’s a lot of work to be done to identify how an economy has to transform. What we’ve done is carve out some initial rules.”

Photo: Valdis Dombrovskis (centre), Nathan Fabian (second from right) and others presenting the TEG report on Tuesday; Credit: @VDombrovskis/Twitter.

ABN AMRO