The European Commission has convened a Technical Expert Group (TEG) on Sustainable Finance to assist on the implementation of their Action Plan on Financing Sustainable Growth, we will be meeting for the first time tomorrow
During my journey today, I’ve penned a few thoughts to share with Blog readers…
I’m speeding from Kazakhstan into Brussels for the first meeting of the EU Technical Expert Group on Sustainable Finance (TEG) this Thursday, 5th July.
35 external experts have been selected for the group, spanning asset managers, insurers, banks, stock exchanges, data providers, investors, civil society and academia.
We’ll be meeting frequently over the next year.
It’s an exciting development, a continuation of the process that started with the High-Level Expert Group (HLEG) formed in late 2016. The HLEG took just over 14 months from formation in late 2016 to its final report.
The following high-level Action Plan on Financing Sustainable Growth was launched in March - a response to our HLEG final recommendations.
The pace of the Commission, moving from Expert Group to high-level recommendations to technical legislation, clearly shows that sustainable finance is a priority area.
What the TEG work will involve
The experts are split into four sub-groups. I’m a member of the sub-group tasked with developing an EU Taxonomy for environmental activities. Our task is to deliver a taxonomy for climate mitigation and adaptation, while in parallel looking at broader environmental investments (air pollution, biodiversity conversation and so on).
The taxonomy sub-group will work closely with the other sub-groups, particularly the one that is looking at an EU Green Bond Standard. The remaining two sub-groups are looking at low carbon indices and metrics for climate-related disclosure.
We will be tackling climate mitigation by March 2019 and climate adaptation and other environmental activities by June 2019.
Note again the tight timetable. Other governments and regulators should be adopting a similar pace.
A quick look at the six climate action Milestones identified by Christiana Figueres and M2020 points to how much ground we ALL (governments, regulators, banks, asset managers and asset owners) need to cover over the next 30 months.
Four principles to underpin the EU Taxonomy
There are a handful of foundational principles that will need to underpin an EU sustainable finance taxonomy:
- Science-based: We need to leverage climate science and decarbonisation trajectories.
- Paris-agreement aligned: Limiting global warming to at least below 2 degrees with ambition towards 1.5 degrees, means incremental progress is simply insufficient.
Locking in a low level of ambition on emissions performance into the built environment or new infrastructure assets for 20-30 years will not deliver the urgent and rapid cuts that the science tells us we need.
- Expanding capital flows and investment: Shifting capital allocations to green investment and green infrastructure is an urgent task.
Leveraging existing labelling schemes and the work that has been done so far on taxonomies will enable us to finalise a robust EU sustainable finance taxonomy more quickly.
The HLEG developed a framework for an EU sustainable finance taxonomy which the TEG can make use of. The bonus with leveraging existing initiatives is it avoids a fragmentation of the market.
- Easy to use: Keeping transaction costs as low as possible is essential to scaling investment in green.
One approach is establishing clear sector-specific performance thresholds rather than relying on individual issuer emissions savings metrics.
That’s how we’ve done it with transport under the Climate Bonds Standard, for example. Transport assets that fall below a certain level of emissions per passenger kilometer qualify – which in practice means all electric rail is green, for example, . That’s an easy rule of thumb for issuers and investors to follow.
The threshold reduces over time.
Final Thoughts – To 2020 and Beyond
The development of an official EU taxonomy on sustainable finance is a significant benchmark. Don’t underestimate the wider potential.
A clear taxonomy is another ramp up mechanism to help scale both the green bond market and other green finance instruments.
Building the framework for investment while maintaining a strong environmental ambition is the crucial combination we need to see.
A taxonomy also offers a blueprint for planners and developers: it tells them which assets are aligned with building a sustainable Europe.
But that’s just a beginning.
It’s not just an important step for the EU, it’s a step towards a harmonized global taxonomy on green – and that’s what we also need to see. Governments and regulators worldwide should see the TEG process in the context of regional and then international taxonomy harmonization. A process that will help align capital flows into climate and green objectives all through the 2020s.
The more immediate expectation is that the global financial sector, the big banks and issuers, will meet the short-term milestones like the USD1 trillion in green bonds by 2020. And that the biggest global emitters will clearly demonstrate to investors and regulators that the brown to green transition is actually appearing on their balance sheets and in their capex programs.
The 2020 decade is what the TEG is aimed at. You’ll have to wait a year’s time for the final report and I'll keep you updated on progress along the way.