Bumper report from the European Commission sets out criteria to define sustainable finance in a bid to protect investors from 'greenwash'
In an attempt to fire up investment in low-carbon infrastructure, the European Commission yesterday released a mammoth 414-page report defining what it means by "green" finance.
The taxonomy, drawn up by the Commission's Technical Expert Group (TEG) on sustainable finance, aims to offer investors and companies a classification system to identify economic activities that are environmentally sustainable, and to help them measure their investments' real world impact.
The EU has a target to cut greenhouse gas emissions by 40 per cent by 2030, and is weighing up adopting a net zero emission goal for 2050. Such targets will require substantial private investment in new low carbon infrastructure and technologies, from greener buildings and industrial facilities to electric vehicle infrastructure and clean power generation capacity.
The EU is hoping its efforts to define a consistent framework and common language for sustainable financial products will formalise the expanding green finance market and give investors and companies more confidence in financial arrangements marketed as "green".
It comes as the global green finance market is experiencing record levels of growth, with overall issuance of sustainable debt products surging 26 per cent to $247bn last year. But as interest in the market has increased, so has concern that some products are being touted as 'green' while supporting high-carbon incumbent industries. For example, in 2017 Spanish oil firm Repsol issued a controversial €500m green bond to upgrade equipment and boost efficiency at its chemical and refinery facilities. Campaigners at the time argued such a bond offer could not be labelled as 'green', as it was not supporting an investment in line with the goals of the Paris Agreement. Other examples have abounded as a debate has raged over whether energy efficiency upgrades in carbon intensive industries can really be classified as green when the world needs to transition to net zero emissions.
As such environmental campaigners broadly welcomed the new initiative from the EU. "Restructuring the global economy in 30 years to eliminate fossil fuel use is a task unprecedented in complexity and pace," Nick Mabey, chief executive of the climate think tank E3G, noted in response to the new taxonomy. "The EU has recognised that promoting sustainable finance is key to this and the taxonomy could play a significant role as part of the broad financial and economic framework needed to deliver a sustainable, climate-resilient economy. Avoiding greenwashing is a good start yet expanding the framework to assess the unsustainability of economic activities is a vital measure to address risks and truly re-orient capital."
The TEG also today published a report recommending a set criteria for a green bond, as well as a paper on climate benchmarks and disclosures to help investors keen to develop a climate-positive investment strategy. In further evidence of the green finance sector's rapid move into the mainstream, the report came on the same day as the Bank of England's Prudential Regulation Authority wrote to insurers confirming the latest wave of stress tests they will have to undertake will include "an exploratory exercise in relation to cyber underwriting and climate change".
Meanwhile, the European Commission itself published new guidelines on corporate climate-related information reporting. It said the guidelines combine the climate disclosure recommendations from the TCFD with the TEG's taxonomy suggestions, to provide companies with practical recommendations on how to better report the impact that their activities are having on the climate as well as the impact of climate change on their business.
"The climate emergency leaves us with no choice but transit to a climate-neutral economy model," said Valdis Dombrovskis, vice-president responsible for financial stability, financial services and capital markets union. "Today's new guidelines will help companies to disclose the impact of climate change on their business as well as the impact of their activities on climate and therefore enable investors make more informed investment decisions."
Together the reports represent the technical basis for a package of legislation that could be adopted next year, which will look to shape and drive the rapid expansion of the green finance sector across the EU.
The guidelines are also set to hold particular importance for the UK market, which the government is working hard to position as a hub for global green finance. But by standardising the way "green" is defined in markets across the region, the UK may find it harder to distinguish itself from European rivals.
Helena Viñes Fiestas, BNPP AM's global head of stewardship and policy, is a member of the TEG and said today's publications will provide "transparency and guidance" for directing investment towards low carbon projects. "This is vital, as Europe needs to attract up to €290bn a year of private capital into sustainable activities to meet climate goals alone," she stressed. "It will benefit investors, companies and the public sector, and is a major step forward in defining green financial products."
Meanwhile Jon Williams, sustainability and climate change partner at PwC, predicted firms could adopt the new guidelines voluntarily, such is the demand in the financial services industry for a common language for sustainable finance. "If that's the case, EU legislators should pay close attention to what will be an early test of the usability of the taxonomy," he advised.
However, the new taxonomy has not met with universal approval. Dr Ben Caldecott, founding Director of the Oxford Sustainable Finance Programme and an Associate Professor at the University of Oxford, wrote earlier this week of his fears that the new guidelines could prove counterproductive.
In a Twitter thread accompanying an article for Responsible Investor, he said he was "extremely reluctant to 'go negative' on the... green taxonomy given the overall strength of the EU Sustainable Finance Action Plan, as well as the hard work of the TEG and its various working groups". But he insisted many observers had concerns, setting out concerns that the attempt to establish a "binary green/not green assessment" would struggle to reflect the complexity of the market and the net zero transition. He also warned it could inadvertently confine green finance to a niche when "we should want to make green entirely mainstream", inflate an asset bubble, and undermine competition and innovation in a fast evolving market.
I am extremely reluctant to ‘go negative' on the @EU_Finance green taxonomy given the overall strength of the EU Sustainable Finance Action Plan, as well as the hard work of the TEG and its various working groups. However, many of us have concerns: https://t.co/XpYbCzU8ai— Ben Caldecott (@bencaldecott) June 14, 2019
No one doubts transitioning to a net zero emission economy will require significant volumes of private investment, even if experts broadly agree that investment will be recouped through commercially competitive new infrastructure and the co-benefits associated with lower emissions, such as lower healthcare spending to economic growth in new green industries. But private investors must have confidence their money is being used as promised, and that means establishing a common language for designing, describing, and marketing green finance products.
The EU's detailed attempt to install some order in the fast-growing green finance sector should help ensure more investors and companies across the bloc are singing from the same green finance hymn sheet. It should provide a clear boost to an already fast expanding and increasingly strategic green finance sector. But perhaps inevitably, any hopes that a new taxonomy might bring to an end the debate over which projects qualify as 'green' look set to be premature.
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