EU advisers propose transition-focused extensions to green taxonomy

Financial market participants have been asked to apply the proposals voluntarily.

The EU’s Platform on Sustainable Finance has proposed extending the EU green taxonomy in a bid to provide broader access to transition-focused financing.

On March 28, members of the EU-convened Platform unveiled initial plans for an ‘extended environmental taxonomy’ which would encompass a ‘red’ performance category for environmentally harmful activities excluded by the green taxonomy, and an ‘amber’ or intermediate category for activities with low environmental and climate impact. It is thought that this approach could eventually map all activities across the real economy.

According to a version of the plans seen by Responsible Investor, the Platform has suggested that the extended taxonomy could underpin a new direct financing mechanism for companies transitioning out of significant harmful environmental performance levels (under the red category) to intermediate performance (amber), or for those transitioning within the amber category through improving environmental performance.

Such financing would only be available for companies with established 5-10-year capital expenditure, or capex, plans for the specific transition activity, in addition to an entity-level climate transition plan which includes long-term and interim environmental targets.

Companies looking to transition only within the red category should not be able to access green financing despite relative improvements, members said.

They also suggested that the decommissioning of coal plants or other activities “incapable of transitioning to a low-carbon, environmentally sustainable, Paris-aligned performance level” should be made eligible for green financing – but stopped short of including it the final recommendations. Instead, members called on EU authorities to identify further economic activities fitting this description “in order to support financing (green financing) of the urgent decommissioning investments needed of these activities”.

While the EU green taxonomy does currently recognise some green transition activities, it does not include transitions towards intermediate levels of performance which do not meet its environmental objectives.

“This approach is an alternative to the current taxonomy regulation approach which focuses on green and sustainable environmental goal-based performance criteria but, importantly, is still firmly based on the current provisions of the taxonomy regulation,” said Platform chair Nathan Fabian during a presentation of the proposals.

“Without rigour and coherent definitions which can be translated for global markets, there is a growing risk of transition-washing.”