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Fund industry welcomes final ‘game changer’ EU taxonomy report

Which ‘aims to provide clarity for investors on what can be regarded as a sustainable investment’


Natalie Kenway

Industry representatives have welcomed the recommendations and “user guidance” published by European Commission’s Technical Expert Group on Sustainable Finance (TEG), with some predicting asset managers will use the EU Taxonomy ahead of the end of 2021 deadline.

Set up in 2018, the TEG was tasked with assisting the European Commission in compiling an EU classification system – the so-called EU Taxonomy – to determine whether an economic activity is environmentally sustainable, as well as detail an EU Green Bond Standard, provide methodologies for EU benchmarks and implement guidance to improve corporate disclosure of climate-related information.

In December, EU negotiators agreed on a provisional taxonomy deal to determine what economic activities can be considered green to help tackle climate change.

The taxonomy is ultimately a list of economic activities and corresponding performance criteria consistent with the EU’s commitment to reach net-zero carbon emissions by 2050.

The TEG’s report said: “Transitioning to a climate-neutral economy by 2050 requires clear tools and guidance, reflecting scientific evidence and market experience, to give confidence to companies and investors to act.”

The final report provides sustainability criteria for 70 economic activities in sectors that generate 93% of Europe’s emissions. This will mean that if economic activities such as electricity generation, urban transport, crop agriculture and cement manufacturing meet the Taxonomy criteria, they can be classified as environmentally sustainable within financial products.

Quick off the mark

Climate change think tank E3G said the final report has built on the previous draft by expanding the criteria for climate adaptation and revising the criteria for buildings, forestry and manufacturing activities, while also setting expectations for the future environmental integrity of financial assets and products.

E3G also said companies within the financial services community, such as asset managers, may begin to use the taxonomy in advance of legislation due to come into effect in 2021, thanks to the “substantial new user guidance” in the form of a technical annex provided alongside the final report, which was published on 9 March.

This contains an explanation of the taxonomy approach, methodologies, user and case analysis, economic impacts of the taxonomy, and a full list of screening criteria.

First, do no harm

Adrie Heinsbroek, principal responsible investing at NN Investment Partners, commented: “The EU taxonomy aims to provide clarity for investors on what can be regarded as a sustainable investment.

“Next to clarity it also provides transparency as investors can provide insights in the allocation of capital for this transition.”

The Dutch investment firm said it “echoes the importance of the efforts made by the TEG, to include provisions of doing no significant harm to other environmental objectives, as well as balancing the climate objectives with social objectives in the form of the OECD Guidelines and UM Guiding Principles”.

“This safeguards that positive climate efforts by corporations will have to go hand-in-hand with prudent social corporate behaviour.”

Invaluable tool

Helena Viñes Fiestas, global head of stewardship and policy at BNP Paribas Asset Management and a member of the TEG, said: “The taxonomy is a game changer.  It sets a clear path for the transition of different economic activities, and by doing so, helps companies and investors to plan and report on their efforts to transition to a low-carbon and more sustainable economy.

“For asset managers such as ourselves, the taxonomy will become an invaluable tool to help us construct our green portfolios and engage with companies.

“It also enables consistent reporting on the percentage of each fund that can be considered sustainable, facilitating ‘apples to apples’ comparisons for end investors.”

Sandrine Dixson-Declève, senior associate at E3G, and member of the TEG on Sustainable Finance, added the final recommendations reflect the “huge efforts” by the members, hundreds of additional experts and public advice inputted through consultations.

“The European Commission should transpose this work directly into the Regulation to establish the taxonomy by the end of year. This framework will help to get the EU, its capital and businesses on track to deliver of a climate neutral net-zero greenhouse gas emissions economy by 2050,” she said.

Meanwhile, Nathan Fabian, chief responsible investment officer of the Principles for Responsible Investment (PRI) and also member of the TEG, agreed: “Clear tools and guidance that reflect scientific evidence and market experience are needed to give confidence to companies and investors to act.  The taxonomy will contribute to building certainty and assurance in the sustainable economy we must have.”

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