European Commission announces new Platform on Sustainable Finance
Usability focus is key to unlock the potential of the EU Taxonomy
This week, the European Commission announced the members of the new Platform on Sustainable Finance, including Climate Bonds.
Climate Bonds has supported the Platform on Sustainable Finance (PSF) to supply the European Commission with technical advice on the EU Taxonomy. The second mandate period of the PSF begins next month, with an expected renewed focus on ensuring usability of the Taxonomy
During the first period, the Taxonomy Regulation and its three delegated acts (climate mitigation/adaptation objectives, disclosure templates and criteria for nuclear and fossil gas) became law. The EU Taxonomy is the first regulatory definition of economic activities contributing substantially to climate change mitigation and adaptation in the EU.
Sean Kidney, Climate Bonds CEO:
"The EU Taxonomy is one of the most powerful tools we have to drive investment towards credible, ambitious efforts to meet our climate targets. Our job now is to make sure that the taxonomy is simple to understand and enables green opportunities not just in Europe but around the world."
The EU Taxonomy is an achievement but needs work to ensure it drives change
The aim of the EU Taxonomy was to help create a credible sustainable finance market so that we can fund the transition to net zero by 2050.
The technical screening criteria provide a common reference for green financial products, allowing for consistent reporting and comparability. The criteria also provide guidance for transition, demonstrating to companies the extent to which they need to decarbonize their activities in order to qualify as green. Several criteria also involve declining emissions thresholds, demonstrating needed transition pathways for activities such as electricity generation.
The regulation mandates reporting of EU Taxonomy-aligned activities for corporates, banks, investment managers and investment funds. Corporates must report not just their green turnover but also their aligned capital expenditure, which indicates how fast they are transforming to become green. This disclosure requirement presents further incentive to reorient investment flows to green.
2023 will be the first year when EU corporate taxonomy alignment reporting is due, on 2022 accounts, applicable to some 4,000 companies. As the EU Taxonomy tool is about to be mainstreamed, reporting entities may struggle with the complexities and useability difficulties of the current EU Taxonomy framework.
One study finds 22.8% of Euro area investor portfolios is eligible for the Taxonomy’s Climate Mitigation Substantial Contribution” measures, but only 2.8% is aligned with the measures, even before Do No Significant Harm (DNSH) assessment. There is potential for a significant preferential market for EU Taxonomy activities but alignment (compliance with the criteria) appears to be very low, due to a lack of data and complicated criteria – particularly for DNSH requirements.
Urgent improvements for the EU Taxonomy to enable usability and improve alignment
The PSF Data and Usability report was published on 11 October 2022. The report is a thorough overview of the useability issues for EU Taxonomy users. In particular, CBI supports two of the suggested simplifications to the framework:
- Need for international equivalences for “Do No Significant Harm”.
The Usability Report explains the criteria for DNSH to the six environmental objectives established in the EU Taxonomy Regulation are a major useability hindrance. They need simplification and clarification. They are also based in EU legislation and must be made usable internationally. Developing accepted equivalent information tables for DNSH will enable reporting of green activities outside of the EU. This will also help auditors to verify taxonomy reported data.
Where data is still not readily available for DNSH measures, the requirements should be simplified to a “best efforts” basis.
- Opportunity to use international certification to make up for missing buildings data.
The buildings sector, responsible for over a third of EU GHG emissions, is critical to the success of the low carbon transition. The EU Taxonomy uses Energy Performance Certificate (EPC) emission levels as the main reference to assess alignment of buildings, but this metric is not consistently used within the financial sector in the EU and is generally not accessible to lenders. The buildings’ industry has developed green certifications which are widely used by developers, in the EU and beyond, such as BREEAM, LEEDs, etc. The Useability Report proposes to establish a list of international buildings certification that could be used for taxonomy reporting, a recommendation that CBI supports and is ready to assist the Commission with. The review of the EPBD, was a good opportunity, to update and harmonise EPCs as well as making it accessible to lenders, but it might be a missed opportunity unless MEPs and Member States show ambition.
A usable EU Taxonomy can enable a large and liquid green finance market in the EU
In 2012, CBI created the first taxonomy, coupled with a certification and verification scheme for green bonds. In 2015, the PBOC followed suit with its Green Bond Endorsed Project Catalogue and in 2018, the EU began developing the Taxonomy as part of its sustainable finance action plan. Now, more than 20 countries and jurisdictions have embarked on the Taxomania ship by initiating taxonomies.
The green and sustainable bond market appears resilient in the face of current market conditions, as evidenced in our latest CBI green bond pricing report, both in terms of issuance volumes and in terms of sustained, albeit modest, greenium. What investors have not yet found, however, is deep liquidity on secondary trading after the initial weeks. This remains the key obstacle to more issuance, as well as greenwashing fears.
By tagging green sales and green capex, the EU Taxonomy paves the way for more issuance, without greenwashing risk, towards the USD5 trillion annual mark that is needed so urgently to tackle climate change and environmental depletion. A more usable EU Taxonomy will reduce reporting costs and fast track the process.
Platform 2.0 will help drive usability improvements to the EU Taxonomy
The Taxonomy tool is a proven, efficient tool to grow green markets. We’re nearly there with the EU Taxonomy, and the new mandate of Platform 2.0 will see further crucial work to improve its usability, expand the criteria to more activities, and monitor sustainable capital flows.
Now is the time to ensure the Taxonomy boosts the green bond market, Platform 2.0 can help ensure its applicability and usability not only in Europe but also globally.
Climate Bonds Initiative looks forward to continuing its work on the Platform, ensuring the EU Taxonomy continues to grow a large and credible EU sustainable finance market.
Sean Kidney is a member of the PSF and was previously a member of PSF 1.0 and the TEG.
