This is the final piece in RI’s ‘The EU Action Plan: What Matters To Me’ series, providing insights from market experts on the implications of the EU Action Plan on Sustainable Finance. Today, we give the last word to the European Commission’s Technical Expert Group on Sustainable Finance (TEG), which has just launched its public consultation on the development of the green taxonomy. Elodie Feller from the UN Environment Programme Finance Initiative (UNEP FI) is a TEG observer, and here she outlines the reasons why the controversial proposal is so important for green finance.
Today, the Technical Expert Group has opened its call for feedback on the EU Taxonomy. To strengthen the Taxonomy further, we encourage you to respond.
Here are five reasons why the Taxonomy matters.
1. The Taxonomy supplements ESG integration
ESG integration is important and is having real-world impact, but the taxonomy goes a step further. It is a tool that investors can use to translate climate change targets – such as those agreed by EU and member state governments – into measurable economic activities. The Taxonomy supplements, rather than replaces, ESG integration.
2. The application of the Taxonomy is flexible: it can be used to allocate capital and it can be used for stewardship
There are two parts to the proposed investor disclosure requirements. First, if and how the taxonomy has been used. Second, the percentage of investee activities financed by the portfolio that is consistent with the Taxonomy. The flexibility comes from the if and how. The comparability comes from the percentage. Investors still have to decide for themselves where to invest.3. The Taxonomy includes low-carbon activities and those that contribute to transition
The Taxonomy is a comparative tool, and to have such a tool, a line must be drawn somewhere on the environmental performance of economic activities (and the TEG has been clear on the rationale and evidence it has used to draw that line). But the taxonomy recognises that we already need low-carbon activities, as well as those that contribute to the transition, to achieve climate change targets. Investors can also adapt the use of the Taxonomy to their own local context.
The Taxonomy supplements, rather than replaces, ESG integration.
4. The Taxonomy is credible
The Taxonomy’s development has involved experts in the relevant fields for industry, finance and the environment – as well as policymakers. The Taxonomy is the primary recommendation of the EU Action Plan on Financing Sustainable Growth. The Taxonomy will be supported by an ongoing policy-backed platform.
5. The Taxonomy supports improved corporate disclosure
Investors will need to understand the economic activities of the companies they finance – this will naturally require improved corporate disclosure. The Taxonomy supports companies and investors to understand how a company can transition its business model. For example, rather than identify a ‘good’ company or a ‘bad’ company, the Taxonomy allows for a more sophisticated conversation about whether the company is transitioning and – if so – how, and overtime, how quickly.
The consultation period closes on 13 September – we encourage you to respond.
Elodie Feller is investment lead at UNEP FI and an observer in the TEG.