The European Commission’s expert group on sustainable finance last month published its long-awaited final recommendations for a taxonomy of environmentally sustainable activities, which is at the heart of the EU executive’s plan to harness the finance sector for its fight against climate change.

“For the taxonomy to work in practice, investors will need data about company or issuer performance on the taxonomy activity criteria,” the technical expert group (TEG) said.

Commission vice-president Valdis Dombrovskis said the TEG’s work was “an important contribution to European policy-making and global debate on green finance”.

The TEG said “investors and other potential users of the taxonomy can already start to understand [its] implications” through the reports.

The main report set out technical screening criteria for 67 economic activities that could make a substantial contribution to climate change mitigation, across sectors such as agriculture, forestry and manufacturing. It also included a methodology and “worked examples” for evaluating contributions to climate change adaptation.

Voluntary or obligatory?
Publication of the TEG’s reports comes as political agreement on a taxonomy regulation between the EU Council and the European Parliament remains outstanding. Under the Commission’s proposal, asset managers marketing investment products as environmentally sustainable would need to explain whether, and how, they have used the taxonomy criteria. Investors would be free to explain that that they use alternative methodologies.

Some EU governments, however, are against a disclosure obligation. According to conservation campaign organisation WWF, Germany has proposed that the disclosure be voluntary.

Helena Viñes Fiestas, global head of stewardship and policy at BNP Paribas Asset Management and a member of the TEG, said dropping the requirement to disclose the proportion of an apparently green product’s investments in taxonomy-eligible activities would render the taxonomy “useless”. This was a personal view, she said.

valdis dombrovskis

Valdis Dombrovskis (centre) presents the TEG’s report during the Brussels Economic Forum on 18 June

She also said implementation of the taxonomy would be challenging for investors given a lack of data, adding that “this will prove how necessary it is to make mandatory some reporting by companies”.

The TEG’s proposed taxonomy includes economic activities that are already low carbon as well as “transition activities”, such as steel or cement manufacturing. According to Brenda Kramer, responsible investment adviser at PGGM and a member of the TEG, this was one of the ways in which the TEG’s taxonomy proposal had evolved over the year. There were many ways in which investors could begin using the taxonomy straight away, she added.

Perspectives on the taxonomy proposals

A spokesperson for the European Fund and Asset Management Association (EFAMA) welcomed that the TEG’s taxonomy proposals included transition activities as these were “key to ensure the success of the taxonomy and to enable a transformation towards a sustainable economy”.

“While our members are hopeful that the TEG proposals will facilitate science and evidence-based investments in green activities, concerns remain about how to translate this into a user-friendly system that can be applied by the financial services industry,” the spokesperson added.

“In any case, financial product disclosure based around the taxonomy needs to be underpinned by comprehensive and reliable data at the company and issuer level – otherwise the taxonomy framework, regardless of strength of intention or quality of design, would be impossible to use without the risk of misleading end investors.”

Jakob Thomä, managing director at the 2° Investing Initiative think tank, voiced concerns despite stating that the reports were “impressive in breadth and scope”. 

He said: “Instead of reflecting the diversity of retail investors’ preferences on sustainability and climate, and their demand to have real impact with their money, the focus of this work is on creating a harmonised taxonomy as way of a ‘one size fits all’.” 

“Our research suggests sustainability objectives are personal and diverse. We risk shoehorning retail investors into a single framework. That is not the fault of the TEG, which has done an admirable job, but the problem with the thinking by the Commission that suggests sustainable finance can be reduced to a definition of a limited number of green activities that likely reflect a fraction of the market.

“The apparent strategy is to create a ‘green bubble’ for these green assets, rather than tackling the broader ‘unsustainability’ of capital markets. The strategy risks inflating green asset prices without actually creating more green [investments], thus creating potential financial risk, earmarking green as a ‘niche’ concept, and creating a government-driven approach to something that is dynamic and personal.”

Next steps
The TEG’s mandate has been extended until the end of this year and it will launch a call for feedback by early July on technical screening criteria that have not yet been subject to public consultation. It will also refine and further develop “some incomplete aspects” of the proposed criteria and develop further guidance on implementation and use of the taxonomy.

The TEG’s recommendations are designed to inform a proposed delegated act to implement the taxonomy. Under the draft regulation currently under discussion, this would be developed by the Commission and subject to full public consultation as required under standard procedures.