EU Taxonomy shows the way to net zero by 2050

The Technical Expert Group (TEG) on Sustainable Finance has released its final recommendations to the European Commission on the EU Taxonomy. EIT Climate-KIC was represented in the EU Taxonomy’s work group by EIT Climate-KIC Board Member Sandrine Dixson Decleve and EIT Climate-KIC Head of International Affairs Felicity Spors.

The EU Taxonomy is a classification tool, or list, of economic activities and performance criteria consistent with Europe’s commitment to net zero carbon emissions by 2050 and building resilience to climate change.

The EU Taxonomy provides the clearest picture yet for companies and investors of an economy that can fulfil Europe’s 2030 and 2050 climate goals. It will help to grow low carbon sectors and decarbonise high emissions ones.

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 TEG report provides updated sustainability criteria for 70 economic activities—including changes resulting from an open call for feedback in the summer of 2019.

Economic activities such as electricity generation, urban transport, crop-agriculture and cement-manufacturing, if they meet the Taxonomy criteria, can be called “environmentally sustainable” in financial products.

“There are concerns the Taxonomy will create a green bubble of niche products. This could happen if a lot of sustainable finance products create a demand for sustainable assets, while the supply stalls due to insufficiently ambitious policies,” said Felicity Spors. “However, given the Green Deal and the seriousness of the EU Commission on delivering sustainable finance, I think this is unlikely and the Taxonomy, if supported by clear and strong targets, will ensure we really see a shift towards sustainable finance.”

By providing criteria for activities in sectors that produce 93 per cent of Europe’s emissions, the Taxonomy is expected to vastly expand market understanding of the sustainable financing opportunities available today.

Under the recently agreed Taxonomy regulation (coming into effect in 2021), investors and companies will disclose the environmental performance of the activities they invest in, building confidence and assurance in the green economy.

“The Taxonomy provides the finance sector with a list of green investment opportunities,” said Spors. “Financial flows to these green areas will result in an investment boom in sustainable sectors and is expected to create lots of new jobs.”

The EU plans to include further economic activities in the Taxonomy in the future via a new Platform on Sustainable Finance, which is expected to be operating by the end of 2020. The first company reports and investor disclosures using the Taxonomy are due at the start of 2022.

This is the third report from the TEG and follows over 20 months of technical work involving more than 200 technical experts and two open consultations. The European Commission will now develop the legal instruments (Delegated Acts) to bring the Taxonomy criteria into legal effect.

Spors said:

“It is essential we green finance. Climate change is really urgent, we need to achieve approximately 50 per cent emissions reductions in 10 years and we are feeling the impacts already. The Taxonomy sends a signal to the world that the EU recognises this urgency and the role of the financial sector in delivering a transition to a carbon neutral and resilient future by 2050.”

She continued:

“The Taxonomy comes at a time where there is a lot of concern about potential greenwashing—the Taxonomy is designed to give confidence and assurance to investors.”

What has changed since the June 2019 TEG Taxonomy report?

Criteria for climate adaptation have been included for 68 economic activities—in addition to the criteria for climate mitigation. The criteria require a thorough risk assessment and a plan to address all material vulnerabilities to the economic activities in order to consider related expenditures Taxonomy-aligned.

Buildings, forestry and manufacturing activities have revised criteria—reflecting technical feedback from industry, scientists and the finance community. Energy, transport, agriculture, waste, sewerage, water and information technology criteria have not changed substantially. Do no significant harm criteria have also been added for climate change mitigation.

To support investors and companies, substantial new user guidance for implementing the Taxonomy has been provided in the recommendations. This guidance reflects the recent EU political agreement on the Taxonomy regulation.

The Taxonomy report is complemented by the Usability Guide for the EU Green Bond Standard. The proposed voluntary Green Bond Standard intends to ensure the financed investments contribute to the EU environmental objectives by following the EU Taxonomy criteria. The TEG proposed the EU Green Bond Standard in its report in June 2019. The European Commission will publish its decision on what form the final EU Green Bond Standard should have as part of the Renewed Sustainable Finance Strategy in the third quarter of 2020, following a three-month consultation period.

What is being published?

The final EU Taxonomy Report, which describes changes to the Taxonomy since the political agreement, explains the climate adaptation activities and has extensive implementation guidance for the Taxonomy, including on the minimum safeguards included in the Taxonomy Regulation.

Also, the Technical Annex with screening criteria for 70 climate change mitigation and 68 climate change adaptation economic activities. Included are the ‘do no significant harm’ criteria for pollution prevention and control, use and protection of water and marine resources, circular economy, and protection and restoration of biodiversity and ecosystems.

The TEG has also prepared excel tools to help users of the Taxonomy to implement it in their own activities.

EIT Climate-KIC’s contributions to the Taxonomy

Membership to the TEG was possible through an open call for 35 members from civil society, academia, business and the finance sector, as well as 10 additional members and observers from EU and international public bodies. Members of the current TEG have been appointed as representatives of their organisations (type C members), as individuals appointed in a personal capacity (type A or B members) or as representatives of European entities (type E members). 

Sandrine Dixson Decleve was originally appointed representative for EIT Climate-KIC as type C member and quickly appointed Chair of the Outreach Taxonomy working group and Co-chair of the Manufacturing subgroup. Felicity Spors, originally engaged to support Sandrine, was upgraded to a recognised TEG member based on inputs made in the Manufacturing subgroup—notably on working to include incentives to support the manufacture sector transition towards a 2050 zero carbon resilience society.

Members work through formal plenaries and subgroup meetings for each work stream.

The TEG was initially mandated to work until June 2019 with the possibility of extension until December 2019 to facilitate the transition to the longer-term governance of the Taxonomy.

EIT Climate KIC was actively responsible for ensuring the Taxonomy was a dynamic tool, preparing papers on the rational for ensuring systems evaluation was incorporated, and fully supporting the DNSH approach applied. Additionally, in the Manufacturing subgroup, EIT Climate-KIC worked with EBRD colleagues to introduce opportunities for integrating new future technologies currently not included in the Taxonomy as well as a process for incentivising polluting activities to transition towards a 2050 zero carbon future.

The TEG included three other sub-working groups, including one to develop a Green Bonds Standard that would link to the Taxonomy, one on corporate sustainability and climate related disclosures, including disclosure guidelines in relation to the Taxonomy, and one on investment benchmarks.

Read the Taxonomy: Final report of the Technical Expert Group on Sustainable Finance here.