13 DEC

2019

David Czupryna , ESG News , Highlighted , Opinions , SRI , Topics

European taxonomy: affirming green leadership

European Parliament representatives and member states have finally reached an agreement on the framework for the future European taxonomy of sustainable activities. The new taxonomy aims to provide the EU with a standardised classification system for sustainable business activities. This will have 2 positive consequences: sustainable investments will be channelled towards these business lines and the fight against greenwashing will be enhanced.

At a time when China is significantly scaling back its sustainable investments(1), and with the US government abandoning any claim to be concerned about climate change, this decision deserves unreserved applause. In order to achieve the carbon neutrality objectives defined in the Paris agreement, the European Union requires €180 billion in investments that generate green growth each year. The EU taxonomy must become the vehicle for this ambition, while also confirming Europe’s environmental leadership.

The framework has arrived at the right time to provide a standardised action framework for other major schemes. These include the Green New Deal proposed by the Von der Leyen Commission, which is promoting channelling €1 trillion in sustainable investments by 2030. It would now be best to focus these investments on sustainable activities defined within the EU taxonomy. Furthermore, the EU taxonomy provides the ECB and its new president with a guide to reflect on the role of the central bank within energy transition. We might hope (or perhaps dream) that in the future the central bank, under its prudential role, will channel financing by EU banks away from high greenhouse gas emitting sectors and also restrict its own market intervention in securities that are not compatible with the EU taxonomy.

It is clear that the EU taxonomy will need to be rolled out fully in order to unleash its full impact. In this regard, the creation of the European sustainable investment label, scheduled for 2021, is key. The label is expected to be ambitious while also remaining applicable enough that a sufficient proportion of investors can make a real impact. Although it does not attempt to harmonise the burgeoning European sustainable investment labels sector, it should nonetheless focus chiefly on environmental aspects.

Will it be of use? As an integral part of the EU’s commitment to becoming carbon neutral by 2050, the EU taxonomy represents a significant portion of the combat against climate change. It will focus on the 8 sectors contributing most to the development of a low carbon economy, by defining criteria which are compatible with our common goals. In doing so, the EU taxonomy includes the notion of transition, leaving the door open to high carbon industries like steel production, but setting them highly demanding thresholds so as to gradually diminish their environmental footprint. While we welcome the attempt to provide a coherent approach to combating climate change, we regret that the initial version of the EU taxonomy adopts only a minimum approach to other objectives, including preserving biodiversity and reducing pollution.

For investors wishing to do so, the task of integrating EU taxonomy criteria into their corporate analysis appears complex. The technical report by a group of experts defining the new recommendations is 414 pages long, whereas the French Greenfin environmental label reference document covers only 28 pages. This level of complexity is also due to the very broad mix of data required, large parts of which are not currently systematically available. It is vital that the companies targeted by EU taxonomy make harmonised data available, based, for example, on the standards applied to carbon emissions data within the framework of the European carbon permit trading system.

Despite these pitfalls, the EU taxonomy for sustainable activities enables the European Union to confirm its environmental leadership by defining, without too much ambiguity, which business lines have their place in a low carbon economy, and by inviting investors to focus on these industries before inciting them to do so. As was the case for the European General Data Protection Regulation (GDPR), the influence of the EU taxonomy is likely to extend beyond the European Union, for example, by inciting non-European companies wishing to attract European capital to integrate the EU taxonomy into their investment decisions. The EU taxonomy provides European financial players with a tool that harbours great potential. Its success will now depend on its application through tangible regulations and the availability of data required for analysis by companies. Let us not lose this momentum as time is short.

Edited by David Czupryna, Head of ESG Client Portfolio Management at CANDRIAM