The Sustainable Finance Action Plan is a milestone of the EU policy on issues relating to ESG and adaptation to climate change. A number of legislative proposals have accompanied the action plan in order to ensure that financial products are used to promote sustainable activity as the driving force for the EU’s transition to a greener economy.
The so-called taxonomy proposal sets the foundation for sustainable investments in the EU and the criteria for which activities are eligible to receive “green” investments by establishing a classification system in sustainable finance framework. In other words, the taxonomy proposal clarifies which economic activities can be considered environmentally sustainable to receive investments.
The challenge for the taxonomy is not to make finance greener, but to bring about a greener economy. Therefore, it should be designed as a tool to help companies grow and create jobs whilst facilitating the transition to a sustainable economy.
Clarification of key terms
In order to shape the taxonomy into an effective tool, the regulation needs to address several key issues. The first is the clarification of the term “environmentally sustainable activities”. It is extremely important for this concept to not exclude economic activities per se, but be an analysis of best environmentally sustainable performance for each activity.
This should go far beyond the activity level and, as was done in the EU Emissions Trading Scheme Directive, measure the real performance indicators and benchmarks at company or installation level.
It is also important to better define the degree of granularity in technical screening criteria to avoid penalising a company using eco-sustainable technologies for engaging in economic activities that are not considered sustainable. This way, companies can find and integrate innovative solutions in order to enhance the sustainability of certain actions.
The integration of a forward-looking and inclusive approach to economic activities is another issue. Sustainable finance primarily aims to enhance a continuous transformation of “brown” activities into “green” activities. Alongside with using finance to further enhance green activities, meaning making green greener, EuropeanIssuers believes that a more effective taxonomy can be achieved by targeting less sustainable activities. If companies are to develop plans to turn “brown” activities into “green” ones, then they should be able to raise capital through sustainable finance.
The notion of transition to a green economy is important. Drawing up a list of brown or harmful activities would foster investors’ exclusion strategies and risk decreasing financing of large greenhouse gas emitters committed to get greener. These actors should not experience more difficulties to finance their transition even though they have the strongest environmental impact. This is what EuropeanIssuers means by transitioning to a green economy. It is essential to keep the focus of taxonomy on making the unsustainable sustainable.
In addition to these key issues, other aspects must be considered to establish an effective taxonomy for sustainable finance. The taxonomy will help companies to grow and transition in a sustainable manner, but this must not be done at the expense of high administrative burdens. If too many obligations are included, the taxonomy could be quite expensive for companies.
Currently, the EU is in a race to meet the 2050 goal of net-zero emissions. EuropeanIssuers firmly believes that this can be achieved if the EU acts decisively and focuses on environmental factors. Due to the urgency of this matter, the proposal should maintain its original scope, which is limited to environmentally sustainable financial products. Although EuropeanIssuers supports minimum social safeguards, the focus of taxonomy should stay environmental only at this stage. The inclusion of social criteria in taxonomy is premature since it requires an in-depth analysis and identifying relevant indicators, which need more time to be properly addressed.
EuropeanIssuers also supported the European Council’s approach in guaranteeing sufficient consultation of national experts through the creation of Member States’ Technical Expert Group, alongside the Sustainable Finance Platform, which would allow the European Commission to gather the necessary expertise. This could be vital to assess the implementation of these criteria, the outcome of their application by financial market participants and their impact on capital markets.
Another important point is that it is critical to involve non-financial companies in the dialogue with other stakeholders because they play a key role in energy transition and reporting processes. Their participation in the Sustainable Finance Platform should be strengthened to ensure a balanced and diverse stakeholder group. Furthermore, it means that companies can develop environmentally sustainable projects so as to create a positive impact for the European economy.
Other aspects of the taxonomy which would create unnecessary administrative burdens for companies include the requirement for third-party verification of compliance with the regulation. The “comply or explain” approach pushes corporates to declare that their financial product does not pursue sustainability objectives. Obliging companies to comply by the regulation or to explain would create an obstacle that companies would have to spend resources dealing with reporting and compliance rather than redirecting them to sustainable activities and growth.
Overall, EuropeanIssuers sees the potential benefits the taxonomy would bring to issuers if it is designed as a tool to help companies grow through the sustainable transition process. By ensuring that these aspects of the taxonomy are addressed, we will begin to see significant progress in transitioning to a more sustainable economy while fostering a healthy growth level for companies across the EU.
Florence Bindelle is secretary general and Frederico de Santos Martins is policy adviser at EuropeanIssuers, which represents quoted companies across Europe.