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Sustainability Blog #3:

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News - 24 November 2021

Launching a (green) Taxonomy and then what?

COP26 is top of mind and the EU Green Taxonomy regulation is in the process of being implemented within the European market. This might be a good point in time to take a deep breath and focus on what the immediate impact for the real economy is from the Financial Institution’s lens and what might be next on the regulatory agenda around Environmental, Social and Corporate Governance (ESG).

So my statement for today is as follows:

The future success of transforming companies, by accepting ESG as a key metric within their business, is tied to the ability to eliminate greenwashing in the market.

What is the EU Green Taxonomy?

The EU Green Taxonomy is a classification system for the categorisation of green, thus environmentally friendly, business activities, defining environmental objectives for companies and financial players. The taxonomy was created with the objective to reach EU’s climate goals as substantiated in the COP 21 Paris agreement.

The fundamental pillars of the EU Taxonomy are the 6 environmental objectives defining the purpose of the entire framework:

Am I affected by the EU Green Taxonomy?

For companies not yet affected by the EU Taxonomy reporting is voluntary. Nevertheless, any company – affected by the Taxonomy or not – benefits from showing their stakeholders and investors that they are committed to making the sustainable transition.

Why do we need it?

The challenge is reorienting capital flows from brown to green, whereby all market players have a joint understanding of what green actually is.

So the goal is clear, it’s channelling capital efficiently towards sustainable investments and activities to tackle the major challenge of achieving a 55% reduction in greenhouse gas (GHG) emissions by 2030 and net zero GHG emissions goal by 2050 for the EU. But why is it so much harder than it actually sounds?

As of today, everybody has an opinion on what is green and what is not. The number of “green” labels and industry frameworks is immense and the heavy polluters come up with the fanciest sustainability reports. We observe a high level of uncertainty (“is this really environmentally friendly?”) and a clear incentive for greenwashing, given the fact that a green perception today makes companies highly attractive for capital.

I’m not a big fan of finger pointing, but in order to illustrate the mess around the topic, a snapshot from one of one of the largest ESG screened ETFs in the market [1] might help. 

We see a “Who is Who” of large technology companies, innovative leaders and even a bank included under the top 10 holdings. Next to several controversial discussions around questionable corporate governance or labour conditions, there is one bank that stands out to me. Several NGOs are focusing on banks and their commitment to fossil fuels since the Paris Agreement was signed, with this bank being at the forefront as by far the largest bank funder for fossil fuels worldwide.

I am not criticising ESG labels per se, what I am criticising is the lack of clarity of definitions and criteria existing, that allows ESG to be used for disguising actual performance rather than making companies and investments comparable in regards to ESG. The EU Green Taxonomy is essential for setting the tone, defining “green” in incredible detail and leaving little room for interpretation and thus minimizing ability for greenwashing.

A 3-Step assessment to reach alignment

You will need to determine which of your economic activities are included in the EU Taxonomy (the economic activities disclosed in the EU Taxonomy are based on a sector classification by NACE). When you know which of your activities or planned investments are represented as such, you can calculate to which extent your company or investment is aligned.

There is a 3-step assessment process required to ensure that each economic activity:

  1. Substantially contributes to at least one of the six environmental objectives (see above)
  2. Does no significant harm to any of the other five environmental objectives as defined in the proposed Regulation
  3. Complies with minimum safeguards as defined in the proposed Regulation

A look ahead

Currently the EU Taxonomy includes 100 activities (mitigation and adaption). The remaining activities from four pillars (protection of water and marine sources, transition to circular economy, pollution prevention and control, and protection of biodiversity and ecosystems) are expected to be released by the end of 2021. All activities are identified under the 9 highest polluting sectors in the EU (e.g. Energy, transportation etc.), which account for > 93% of all EU GHG emissions.

Future implications:

  • In order to achieve net-zero path for all sectors in line with COP21 Paris commitments, the considered thresholds might (still) not yet be enough.[2]
  • Whereas eligibility and criteria of “green” is defined in incredible detail, the “do not significantly harm” remains unclear.
  • An extension of the Green Taxonomy is currently a hot topic in order to also steer on “intermediate” activities and investments. Per today, those would probably be out of scope by eligibility, but they might be crucial to allow for sector transitioning[3].
  • Uncertainty of the “social” pillar, could be overcome by a Social Taxonomy bringing more transparency to investors on the social impact and performance of their investments.

 In the meantime, let me know your thoughts and/or topics you would like to zoom into via E-Mail (Stefan.stubing@abnamroabf.com).

Yours, Stefan

[1] iShares MSCI World ESG Screened ETF (ISIN IE00BFNM3K80) Top 10 holdings as of Oct 29, 2021

[2] See Schütze, F., Stede, J., Blauert, M. & Erdmann, K. (16. December 2020). EU-Taxonomie stärkt Transparenz für nachhaltige Investitionen. DIW Wochenbericht, S. 971-986.

[3] On 21 May 2021, the European Banking Authority (EBA) disclosed a green asset ratio estimate of 7%-8% (this is the proxy for expected amount of EU green taxonomy aligned assets in the EU).

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