The European Commission’s official advisory body, the EU Platform on Sustainable Finance, wants to create ‘taxonomy-aligning benchmarks’ or TABs.
The methodology would build on the EU’s Paris-Aligned Benchmarks (PABs) and Climate Transition Benchmarks (CTBs) – part of the Commission’s original Sustainable Finance Action Plan in 2019. They serve as labels for index providers and investors that want to be seen as using credible climate benchmarks.
Andreas Hoepner, a member of the EU Platform on Sustainable Finance, described the PABs and CTBs as “a big success”, claiming that around €120bn is now being run against the labels.
Last week, the Dutch central bank DNB said it would use a PAB as the “starting point” for its decarbonisation pathway as it moves its portfolios towards becoming net zero by 2050.
However, IPE reported earlier this year on frustrations from a number of investors and index providers about perceived limitations in the EU methodologies.
Carbon haircuts and CapEx
Hoepner noted that some investors find the initial decarbonisation requirements too steep.
PABs and CTBs require a 50% and 30% upfront carbon reduction, respectively, followed by 7% annual decarbonisation of the benchmark.
TABs would not require any upfront decarbonisation. The 7% annual rate would remain in place, but could be offset by green capital expenditures.
“So you can have any fixed income and equity universe to start with, and retain the carbon intensity of the benchmark, but companies must decarbonise 7% year-on-year unless they are investing in green CapEx,” explained Hoepner.
Under the EU’s taxonomy regulation, large companies must disclose how much of their capital expenditure is being allocated to climate-aligned business activities. These definitions would be the basis of the TAB methodology.
If 100% of a company’s capital expenditure was taxonomy aligned, it would not have to decarbonise that year. If the figure was half, it would receive a 50% ‘decarbonisation holiday’, meaning it would only need to reduce its annual emissions by 3.5%.
“Firms like renewable energy companies, which have lots of green CapEx, shouldn’t be hampered if they’re cleaning up the grid,” said Hoepner. “This approach means companies can be included because they’re either greening the system or they’re decarbonising.”
He noted that the TAB label targeted investors that “don’t want to be the most Paris-aligned, but want something less steep”.
The consultation is open for three months.
Global influence of EU rules
Earlier this week, Amundi noted that EU regulation on sustainable finance had proven hugely influential across the globe, saying: “Regulators around the world regard [the Sustainable Finance Action Plan] as a benchmark for their own sustainable finance legislations and its extraterritorial reach should not be underestimated”.
In a report about what to expect from responsible investment in 2024, the French asset manager added that “the evolution of the Action Plan is set to have a profound, long-lasting impact on sustainable funds, shaping what can be defined as ‘sustainable investing 3.0’”.
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