Clarity and transparency to boost EU’s Sustainable Finance Action Plan
The EU taxonomy for sustainable activities is a major step towards mobilising capital behind the Paris Agreement and UN SDGs says Trevor Allen, Sustainability Analyst at BNP Paribas Global Markets
The finance industry has both the will and
the capital to make a significant contribution to the fight against climate
change. But while investments in green and sustainable activities are
increasing, growth has been restrained by the need for a clear and
comprehensive framework to define and compare investments. The European Commission’s Sustainable Finance Action Plan, released in March 2018, is designed to help
unleash the financial sector’s potential to work towards the targets of the
2015 Paris Agreement,
which aims to strengthen the global response to the threat of climate change,
and the United Nation’s Sustainable Development Goals (SDGs).
Four pillars of the EU Sustainable Finance Action Plan
The Action Plan has now been given a major
boost with the release of a taxonomy
for sustainable activities. This may not
seem an overly glamorous development, but a single, unified classification
system for green investment will likely have profound effects on the potential
power of finance to drive sustainable growth. This is a welcome development
that will make it much easier for investors, issuers and banks to get off the
bench and take part in the fight against climate change.
The aim of the taxonomy is simple: to
translate the goals of the Paris Agreement and the UN SDGs into financial
action by providing a harmonised view across countries and industries on what
defines a sustainable investment. This detailed, uniform approach will reduce
the effort and cost involved in defining what sustainability looks like, and
will help companies communicate how their activity meets environmental goals.
This in turn helps mitigate the risks of ‘greenwashing’, giving investors more
confidence to back green initiatives. Interestingly, it also shifts the focus
from measuring the carbon footprints of companies and activities towards
proactively encouraging investment in firms or assets that reduce greenhouse
gas (GHG) emissions globally, creating a new, encouraging dynamic for private
finance to engage with sustainability.
The taxonomy defines six environmental
objectives to which companies must make a significant contribution in order to
be considered eligible for investment. These include ‘Climate Change
Mitigation’ – a company must be a low-carbon emitter and be likely to have a
consistent, unwavering impact on reducing GHG emissions to 2050 and beyond; and
‘Climate Change Adaptation’: even if not necessarily a low-carbon company,
their activity leads to the reduction of emissions, perhaps by facilitating
other industries’ alignment with the low-carbon economy – think of the
production of solar panels for solar farms as an example. Moreover, any company
seeking eligibility will not only need to show they are supporting one or more
of the goals, but also that they are not doing significant harm to the others. Six environmental objectives defined in the taxonomy The goals are then applied across seven
industries, with technical, science-based specifications and targets covering
nearly 70 activities, accounting for 93.2% of global GHG emissions, according
to the taxonomy
report.
This creates a robust and transparent
measure of how ‘green’ a company is, opening the door to investment from sustainably-minded
financial firms. The framework is expected to have a significant impact on
sustainable financial markets in Europe and beyond. By simplifying and
clarifying the definition of green investment in such a comprehensive and
detailed way, the taxonomy will likely encourage asset managers and insurers in
particular to launch more green products, such as investment funds, in the
future, with an increase in liquidity for the market overall. In short, the EU
Sustainable Finance Action Plan just got a tremendous boost.
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