The EU Sustainable Finance Taxonomy has been the most talked-about element of the wide-ranging EU Sustainable Finance Action plan.
Powerful Japanese business lobby Keidanren is one of the strongest opposing voices, recently stating that standardisation and uniform application of the taxonomy risked hindering innovation for global sustainable development and destabilising international financial markets.
In general there have been concerns that the EU taxonomy will become a de facto global sustainability standard for finance. Dr. Karl Ludwig Brockmann, Group Officer for Sustainability at the KfW, the German state-owned development bank, who helped shaped the EU taxonomy, disagrees. “It is a disclosure obligation,” he explains. “For defined products financial market participants will have to specify how and to what extent the investment meets the taxonomy criteria
“In areas where the EU taxonomy has not been developed so far it could make sense to add a different taxonomy. And again, this is a disclosure obligation. It does not restrict the investment universe of investors. It’s very clear.”
Brockman is part of the EU Taxonomy working group, one part of the EU’s Technical Expert Group (TEG) on Sustainable Finance, the group of industry experts helping the Commission develop its Sustainable Finance Action plan. His colleague, Doris Kramer, KfW’s Head of Investment Strategies/Sustainability, sits on the green bond principles sub group. (KfW is one of the world’s largest green bond issuers).
The Taxonomy is a proposed list of economic activities identified by the EU as supporting a low-carbon transition. The most recent development has seen EU member states vote to delay its implementation till the end of 2022 and controversially leave the door open for nuclear energy to be eligible for green finance.
The TEG developed technical screening criteria for the Taxonomy. Brockmann won’t talk about specifics in the working group. But he does say “it was much more in a common understanding than I thought, there was really no hard battles. As expected I experienced some parallel interaction with external stakeholders”.
Brockmann says the taxonomy is a positive incentive approach and “not intended to divide the world into good and bad”.
He says: “This could be a common language to develop products and translate the Paris Agreement into the financial sector. Companies will feel the pressure to describe themselves in terms of the taxonomy. So if you have a multipurpose company, like Siemens or General Electric, and they operate in Europe, they should check ‘which of my activities are green and which are not’ and to what percentage.”Brockmann says this will deepen investor and company engagement on climate change and sustainability.
Brockman says the next steps for the TEG, which has an extended mandate, will be evaluating the feedback from stakeholders on its technical report on the EU taxonomy and advise the Commission for the next steps.
Usability and implementation is a major issue. “Maybe this has to be played by the European Commission or by the financial sector itself. We need credible processes like in the green bond area. There will be questions about labels and accreditation schemes for potential verifiers.”
“It’s very important and it’s still open to discussion.”
Brockmann’s involvement in the TEG and EU policy on sustainable finance comes as KfW makes a major push into sustainability.
The German state promotional bank has a goal to become Paris-aligned across its €500bn balance sheet in the near future.
It’s part of a new sustainability strategy developed by the board and co-led by Brockmann.
“We know that the Paris agreement has the target that the world should be CO2 neutral by the second half of the century. And we at KfW want to help our clients on their way towards greenhouse gas neutrality,” he says.
KfW was founded in 1948, as part of the Marshall Plan to rebuild Europe after World War Two. It quickly grew strong financially, first focusing on the reconstruction of Germany, then widening its activities internationally; today, it operates in 80 countries.
KfW is separate from the German government, but it has a state guarantee, meaning it can refinance itself on the capital markets on nearly as good terms as the government.
Its new sustainability strategy has been driven by its CEO Dr Günther Bräunig, who also holds the role of chief sustainability officer.
Brockmann says the strategy is strengthening its existing sustainability ethos, but also admits there is self-interest. “We have a demographic problem. So we are actively trying to be an even more attractive employer,” he says.
Current key performance indicators include commitments on gender diversity in management positions and to have at least 38% of its new loan commitments being environmental and climate-related. In 2018, this translated into €75.5bn of loans and grants overall, of which more than €30bn (approximately 40%) were environmental and climate-related.
A ‘Sustainability Mission Statement’ was published in March of this year, followed by KfW’s first group-wide exclusion list in July. The list focuses on activities such as trading in controversial weapons or destructive fishing; also excluding coal.
It will start reporting alongside TCFD recommendations next year.