The Platform on Sustainable Finance (PSF) has told the European Commission that its environmental taxonomy should be extended to explicitly address economic activities that are not green but need to change for Europe’s environmental goals to be achieved.
In its final report on the matter, published last week, the expert group said it was recommending the taxonomy framework be extended with priority given to an extension towards activities that require urgent transition to avoid causing significant harm.
The taxonomy regulation, which was published in 2020, requires the European Commission to deliver a report on the possible extension of the taxonomy to other economic activities. The Commission said it thanked the PSF for its work on an environmental transition taxonomy and that the report would be “carefully analysed in due course”.
The PSF last week also published a report on technical screening criteria for the taxonomy’s non-climate change objectives.
As concerns extending the taxonomy framework, the PSF has recommended adding a transition (amber) and harmful (red) category. It also recommended an extended taxonomy classify “low environmental impact” activities that would need to be regarded as neither red, amber nor green.
The PSF said that such a taxonomy already exists in that the current framework already lays out different environmental performance levels, but that it does not clearly label them or make them easily applicable by markets and other financial actors. The expert group also suggested the development of transition guidance at an activity and entity level.
According to ShareAction, the extended taxonomy will cover up to 100% of the EU economy and of financial portfolios compared with the existing green taxonomy, which currently only covers up to 5% of EU market activities.
“Since the proposal of the taxonomy regulation, it has become increasingly clear that many taxonomy users could benefit from an extension of the taxonomy framework to introduce other performance levels,” wrote the PSF in its report.
“Doing so would enhance transparency and would also allow for more nuanced decision-making and lend wider support to an environmental transition in the whole economy.”
However, the PSF said there are trade-offs that would need to be considered well, especially the high level of complexity of an extended taxonomy framework, costs of additional reporting obligations and potential reputational risks linked to increased clarity on non-aligned disclosures, “all while the original taxonomy is just starting to be used and before the impact of its use can be formally assessed”.
A spokesperson at PensionsEurope, the pan-European pension fund association, told IPE it supported broadening the scope of the taxonomy to cover sectors that play a role in the transition towards a more sustainable economy (amber), as well as sectors that do not have a significant impact on environmental sustainability (grey) and economic activities that significantly harm environmental sustainability (red).
“This should lead to a ‘general taxonomy’ that would provide more insight into the risk exposure of portfolios, allowing to better advise asset owners on their transition strategies,” the spokesperson said. “We do not support a binary ‘green’ versus ‘brown’ division.”
At campaign organisation ShareAction, Maria van der Heide, head of EU policy, said it was crucial for investors to know which proportion of their portfolio is not or not yet green, as this is where the urgent action is required.
“They can then either engage with companies to incentivise them to transition or to steer investments away from those activities that cannot transition,” she said.
“The IPCC is clear: we need urgent and expansive action to transition our economy to net zero. The Commission should respond to the report swiftly and develop an extended taxonomy without delay so that investors can act accordingly.”
Alexander Burr, ESG policy lead at Legal and General Investment Management, said the PSF’s extended taxonomy was “another excellent demonstration to policymakers around the world of how they can create a robust package of sustainable finance regulation that will accelerate the transition to net zero”.
“Crucially, including a transition or ‘amber’ category will provide robust definitions on what activities are truly ‘green’ and those that should be classified as ’transitioning’,” he said. “The report also reinforces the need for corporates, not just in the EU, to develop credible net-zero transition plans and reporting capabilities.”
Eurosif, the Brussels-based sustainable investment industry forum, congratulated the PSF on its report, but said that, at this juncture, it would advise against making the green taxonomy framework more complex until concerns over the reliability and taxonomy-related disclosures had been addressed.
“If we want investors to have confidence in the system to steer their investments, they must first have confidence in the data outputs regarding alignment with the taxonomy,” it said.
“Currently the quality and comparability of data is not there yet. If we want investors to use this tool, we need to solve the problem of reliability and availability of the data as well as operational system before thinking about making it more complex.”