Twin announcements presage new stage in green revolution
The text of the EU Taxonomy regulation was released today in Brussels.
The EU Taxonomy provides a common language to describe and help drive capital to climate-related investments. It represents an extraordinary intervention in the EU financial sector.
All investors and large corporations in Europe will be required to report annually on the sustainable portion of their portfolios and activities, and green and sustainable financial products will have to use the Taxonomy’s definitions.
Citizens (and crucially institutional investors) will now have the means to compare which companies are doing more than others to address climate change and to reveal which financial products are meeting Taxonomy standards.
The EU Taxonomy is made up of science-based criteria in four areas: low-carbon, transition (high-carbon to low carbon), enabling and adaptation.
Transition components will be subject to review (tightening) every three years.
The Climate Bonds Initiative established the first Taxonomy 8 years ago now as voluntary international guidance. In 2015 our CEO Sean Kidney was a member of the People’s Bank of China (PBOC) Green Finance Task Force that recommended a Chinese taxonomy to guide the setting up of a Chinese Green Bonds market.
They did that, and now China has the world’s second-largest green bond market.
In 2017 the EU High-level Expert Group on Sustainable Finance (HLEG) of which Sean was also a member) recommended an EU Taxonomy. The Eurpean Commission has now done that.
And earlier today the EU itself confirmed its 2030 emissions reduction target of 55% that underpins the Taxonomy.
The People’s Bank of China chose today to also release its updated taxonomy, called the “Green Projects Catalogue”. The update brings it closer to the EU Taxonomy; it also incorporates language around Do No Significant Harm (DNSH) principle (taking a page from the EU Taxonomy) and also indicates the future possibilities of rolling out a "transition finance" standard.
The timing of the release, in the lead up to the Biden Climate Summit, is a signal to the market of coordinated action between the EU and China to address climate change.
Role of IPSF
The two economies are actively working to develop a “common ground” taxonomy to drive global investment in sustainable solutions, under the umbrella of the International Platform on Sustainable Finance (IPSF), an EU-led association of countries committed to work on sustainable finance. The members of the IPSF now represent over half of global GDP and half the world’s population.
The EU Taxonomy is an extraordinary advance, establishing minimum requirements for the description of environmentally sustainable investments.
Does it need improvement? Yes, it does, in areas such as forestry and bioenergy. However, it does maintain the TEG recommendation in electricity generation of 100gms CO2/KWh.
Pressure from some member States to weaken the criteria to include gas-fired power as Paris Agreement consistent investments — in contradiction to the IPCC 2018 report and IEA 1.5C modelling in the same year — has so far been resisted, with further debate on the issue deferred until later in the year.
And importantly for the European green property bond market, Real Estate related criteria have been brought in line with EU Technical Expert Group recommendations from last year. A good result, publicly supported today by the European Mortgage Federation/European Covered Bond Council .
The EU Platform on Sustainable Finance (Climate Bonds is represented by Sean) is now working on the next generation of criteria to be added to the Taxonomy. These will address circular economy, pollution prevention, biodiversity and water protection, as well as assessing possible extensions to less green and ‘social’ investments . A draft will be published for public consultation mid-year.
Where next on global standards?
The EU’s work on Taxonomy has galvanized similar projects around the world, from Colombia and South Africa to Singapore and Mongolia. It has engendered a global debate about what should be counted as relevant to addressing our climate challenges.
Next will be the European Commission V2.0 Action Plan on Sustainable Finance, due out soon. This will have a host of new measures to mobilize capital for sustainable solutions; we expect it to pick up more of the recommendations made in the 2017 report of the High-level Expert Group on Sustainable Finance report.
Meanwhile, the PBOC and China’s other regulators are steadily working towards harmonization.
"The green revolution is happening, EU and China have made huge advancements in describing what is sustainable invesment for the markets." - Sean Kidney, CEO Climate Bonds Initiative.
More to come.
‘Til next time