Published on 20 June 2019

SUSTAINABLE FINANCE

The great battle over the european classification system for sustainable activities has begun

Members of the European Commission’s technical expert group recently unveiled the fruit of a year’s worth of labor: a proposal for a regulation on the establishment of a classification system (i.e. taxonomy) to facilitate sustainable activities in Europe. As the backbone of the sustainable finance action plan, it is intended to create a common language for sustainable finance, at an EU and international level. There will be a call for feedback regarding the classification system from July 1st to September 10th.

Presentation of the European taxanomy with Nathan Fabian speaking.
@DR

"A Taxonomy is a classification tool to help investors and companies make informed investment decisions on environmentally friendly economic activities," reads the proposal’s presentation which actively mobilizes various lobbies in Brussels. It is also important for them to know the nature of the activities selected as well as those that have been excluded. Designed to limit green washing as well as the "re-dressing" of some durable solution technologies, the publication of the classification system starts a new stage in the great battle to align the European economy with its environmental objectives, beginning with those that concern the climate.

The financing needs to reach the European Union’s climate objectives alone are estimated between €175 and €290 billion per year. To mobilize and reorient financial flows towards the green economy, the challenge of the action plan is to propose a clear and ambitious definition of what is sustainable. Members of the Technical Expert Group on Sustainable Finance (TEG) conducted an in-depth technical analysis of 67 sectors to determine the conditions under which they make a "significant contribution to the fight against climate change without causing collateral damage".

Three sustainable activity categories

The recently released report covers agriculture, forestry, industrial production, energy, transport, water, waste, real estate and information technology. It also includes a methodology and examples for assessing climate change adaptation needs as well as guidelines and case studies to help investors take advantage of the classification system. This desire to guide investors is also apparent, as evidenced by the length of the document. As Nathan Fabian, member of the TEG and PRI Chief Investment Officer, recalled at the Green Bond Principles annual conference on June 13th in Frankfurt, "with this taxonomy, we have a mission to educate investors".

Sustainable activities are divided into three categories. First, existing low carbon activities that are consistent with a 2050 carbon neutrality goal. Second, activities that could help achieve this goal if they were less emitting. For example, to be eligible the production of electricity must be based on energy that emits no more than 100g of CO2 per KWh. However, this is not currently the case for gas considered by many as transitional fossil fuel. Lastly, activities that contribute to the first two categories: wind turbines, for example.

Clashes over the classification system

Nathan Fabian, who led the technical experts group after participating in the High-Level Expert Group, added: "We also want to create incentives to go from brown to green, so we have included activities in the taxonomy that are not yet low carbon to encourage them to improve.” Aware that companies of all kinds will protest against all of the unveiled work, Fabian has prepared for backlash. But he is hopeful that in the long run the taxonomy will change the situation, companies included. "The objective is to encourage them to communicate the share of their turnover related to the classified activities. That would be a good start!"

Outcry against the green classification system has already begun. Ben Caldecott, director of Oxford's sustainable finance program, explained to Responsible Investor on June 14th: "A binary ‘green’/’not green’ assessment does not reflect reality or the science.  There are ‘shades of green’ and this depends on local and national contexts, and the thresholds that will allow activities to be eligible will be set by an administration that will be influenced by economic lobbies and political actors. "

The next step in the process of building the classification system: a meeting formalizing the release of the report to be held in Brussels on June 24th. It will take place a few days before the opening of a European Parliament marked by greater influence from the Green party. Whatever the critiques against the concept, one of the main contributions of this taxonomy is outlining the imperative need to determine what is green or not, at least at European level.

Anne-Catherine Husson-Traore,  @AC_HT, CEO of Novethic


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