On January 18th 2021 the Energy and Environment Policy Centre hosted a panel event to discuss the new EU Taxonomy on sustainable activities as a part of our theme Does the private sector align with a carbon net zero future? The innovative, pragmatic and science-based Taxonomy regulation is yet another example of the European Union’s leadership within climate change and commitment to meeting its ambitious 2030 and 2050 energy and climate targets.
We welcomed Nadia Humphreys from Bloomberg, Vanessa Harvard-Williams from the law firm Linklaters, Kevin Flowers from the European Commission and Jutta Paulus from the European Parliament. Key questions were posed to these experts regarding the Taxonomy’s role as an enabler to transform the financial sector by scaling up sustainable investment, shifting investments to where they are most needed, protecting private investors from greenwashing, helping companies to plan the transition and ultimately implementing the European Green Deal.
For those less familiar with the new EU Taxonomy regulation, it is a classification system that provides appropriate definitions to companies, investors and policy makers on which economic activities can be considered environmentally sustainable. As Ms. Humphreys put it, it’s difficult to drive and engage in sustainable investment if we don’t understand and clarify what sustainable investments look like and have a mechanism for accrediting those who live up to the outlined standards. Ms. Havard-Williams seconds this by pointing out how the EU Taxonomy is “particularly clever because it is a supranational effort to use the financial markets as a lever to effect significant change in the real economy. It is the most ginormous nudge.”
The potential of the EU Taxonomy is clear, however, will it perform as well on the ground as it does on a policy level? Mr. Flowers, a project leader in DG environment dealing with green finance and economic analysis, explained how essentially the EU Taxonomy is a benchmark ruler that creates a common denominator. It allows you to comb through all financial products marketed as sustainable in the EU to distinguish what proportion of the economic activities of the underlying assets in that portfolio can actually be considered sustainable.
But what if no one understands the common denominator, will its technical basis hinder a successful implementation? Ms. Humphreys, an expert on usability of the EU Taxonomy, admits that the biggest challenge we face is access to data and that there will be a steep learning curve to fill the education gap in which people need to be taught how to report the correct data and how to then digest that data to make a good assessment. Although not worried about understanding the technical criteria themselves, Ms. Havard-Williams and Ms. Humphreys both highlight that currently companies do not engage in the full life cycle assessment of their activities needed to provide the relevant information. Despite the time sensitivity of the matter at hand, both are hopeful we will get there and as Mr. Flowers points out, there needs to be a balance between usability and robustness to ensure it effectively locks down on greenwashing. So although it will take time, and although there is no official EU level sanction in place for those who fail to report accordingly, Ms. Havard-Williams believes total failure to report is going to be the exception due to the commercial consequences attached.
In the context of the United Kingdom’s withdrawal from the European Union, and Boris Johnson’s announcement of the Green Investment Plan and Green Finance Strategy for the country, this newly found autonomy could potentially leave room for the UK to independently establish its own sustainability targets and regulations. The UK has expressed its wish to create an equivalence to the EU Taxonomy that would be adapted to the UK’s domestic characteristics. The Green Technical Advisory Group has been established in the UK with the goal of creating an equivalence to the EU Taxonomy. The aim remains to create a comprehensive and detailed Taxonomy for sustainable finance while allowing the UK to remain competitive in attracting EU capital into the country, given its role as a major financial actor. Nonetheless, Ms. Harvard-Williams expects that the EU will remain the more comprehensive and detailed reference, as the UK seems to be lagging in terms of ambition to reach “dark green” levels of sustainability standards.
A discussion on what the successful implementation of the EU Taxonomy would look like, raised the issue of trade-offs in establishing this new legislation. The goal is to provide a clear and simple guidance for investors of all sizes to use as a reference, while helping to mitigate the consequences of the planetary crisis. The main challenge has been to negotiate trade-offs to meet every sector’s expectations, given the considerable issue of lobbying at institutional level. Ms. Paulus emphasized the need to mitigate the short-term negative impact of the planetary crisis while providing investors with the appropriate tools and support for future commitments. On the other hand, what would a non-successful Taxonomy look like? Mr. Flowers argued that an unsuccessful Taxonomy would be neither used nor enforced or would reproduce the existing market regulations with no significant improvement. In his own words, the goal of the Taxonomy is to make a “substantial contribution to [providing] a more sustainable way of doing things,” using the six objectives as benchmarks. He also acknowledged the existing criticism of the “do no significant harm” clause of the legislation.
During the second half of the event, we opened the floor to questions from our audience One of the first questions was: “How would it work to incentivize activities that have high rewards in environmental and social terms but also high risk in financial terms?” A captivating discussion followed regarding the role of the Taxonomy in providing guidance and incentives. The entire panel emphasized the need for the Taxonomy to be used in complement with other risk-monitoring tools. Ms. Humphreys cited the Sustainable Finance Disclosure Regulation (Regulation EU 2019/2088) as a relevant instrument in allowing investors to understand first how sustainable risks are integrated in investment decision-making and second, what the likely impact of sustainability risks represents on the performance of products they are investing in. As Ms. Harvard-Williams described it, the EU Taxonomy’s purpose is ultimately to provide a “North Star” for sustainable investments.
When responding to a question on the global scope of the European Taxonomy, our panel emphasized the role of governments beyond the European Union in setting national-level classification schemes. The International Platform in Sustainable Finance has already brought together a broad variety of countries with the aim to “mobilize private capital towards environmentally sustainable investment.” A major limitation that such supranational endeavours seek to address is the excess of labels and standards that vary with each country or institution. Ms. Paulus expects that there will be a consolidation of Taxonomies in the long run, which should lead to a global harmonization of Taxonomies and sustainability thresholds.
As a conclusion, we leave you with Ms. Humphrey’s parting words on the need for market prices to reflect externalities, given that “nature is no longer a free good nor should it ever be perceived as such.”
We wish to thank our four speakers Jutta Paulus, Vanessa Havard-Williams, Nadia Humphreys and Kevin Flowers for their presence and valuable contributions to this panel event. The link to the panel recording can be found HERE. Stay tuned for more exciting events from King’s Think Tank!
By Rebecca Flowers and Irina Tabacaru
Rebecca is the Researcher of the Energy & Environment Policy Centre and a fourth year Business Management and Spanish student with an interest in sustainable finance.
Irina is the Director of the Energy & Environment Policy Centre and a final year BSc Political Economy student with an interest in environmental economics and energy policy.
Bibliography
EU taxonomy for sustainable activities. (2020, December 23). Retrieved from https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en
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