EU expert group drives sustainable finance’s mainstreaming two steps ahead

Valdis Dombrovskis, Commissioner for the Euro and Social Dialogue at the Brussels Economic Forum on June 18.

European sustainable finance got an additional boost on Tuesday (18 June), following the release of three reports by the Technical Expert Group on sustainable finance (TEG) focusing on taxonomy, green bonds standards and climate benchmarks.

The three reports, a key part of an EU Action Plan on Sustainable Finance, will become the basis for the development of new regulatory frameworks for the financial sector. The European Commission also published a new guideline on corporate climate-related information reporting for large listed European companies.

The Technical Expert Group on sustainable finance was set up by the European Commission in June 2018 and is comprised of 35 members and four observers from civil society, academia, business, and the finance sector. It also includes additional members and observers from EU and international public bodies. The work of the TEG has been officially extended until the end of 2019.

The reports are to enable the European Union to attract an additional 175 to 290 billion euros a year of private investment to finance the transition to a low-carbon economy, an investment public money cannot cover.

The three reports are interlinked and aim to bring harmonisation and cohesion to a still widely fragmented European market, as well as increase transparency, credibility and usability of sustainable financial tools, market observers point out.

“The goal is to cover the whole economy, not just the dark green niche,” said Alyssa Heath, a senior policy analyst at Principles for Responsible Investment (PRI), who has been engaged in developing the report.

“Now we are at a stage where we encourage investors to see what this working model of the taxonomy means for them,” she added.

Unifying the market of sustainable finance will also minimise competition between member states on a growing market over which European financial capitals are already competing.

“We’re in a climate investment race; to attract the hundreds of billions in private capital needed annually to meet climate and sustainability goals,” said Sean Kidney, CEO of Climate Bonds Initiative. “The EU Taxonomy will clarify what needs to be done and make it easier for investors and banks to grow sustainable finance markets in Europe.”

As it is, Canada has just released a report with the aim to also attract mainstream investors into financing a low-carbon economy.

The reports also address greenwashing – misleading claims about a product’s or service’s environmental benefit – a major hindrance that affects the credibility and growth potential of sustainable financial products.

“We are certain that our work will be very effective in facilitating the transition to a low carbon economy and ensure that there is no greenwashing anymore”, said Sandrine Dixson-Declève, Taxonomy Manufacturing Co Chair.

However, there are important gaps in the reports that will need to be addressed, the expert added. “For example, the TEG has not been able to complete assessments of such key industries such as the mining sector or the fashion industry”.

The recommendations of the TEG in short:

The TEG recommends the creation of two types of climate benchmarks, an ‘EU Climate Transition Benchmark (EU CTB)’ and an ‘EU Paris-aligned Benchmark (EU PAB)’. It also proposes the definition of Environmental, Social and Governance (ESG) disclosure requirements that will be applicable to all investment benchmarks.

The recommendation follows the agreement reached on 25 February between the European Parliament and the member states to create two new categories of low-carbon benchmarks.

The TEG’s proposal means that this agreement underwent major changes since February, market observers note. They notably refer to the high level of flexibility for investors as well as measures to avoid greenwashing.

This explains why the TEG recommends using the highest classification standard for monitoring a company’s greenhouse gases, or “scope 3”. As a reminder, the GHG Protocol Corporate Standard classifies a company’s GHG emissions into three ‘scopes’. Scope 1 emissions are direct emissions from owned or controlled sources, scope 2 are indirect emissions from the generation of purchased energy, while scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain.

The TEG will release a final report in September 2019, which will be used by the European Commission as the basis for delegated acts to the regulation amendment.

The report proposes a draft European Green Bond Standard (EU GBS), defining its purpose and setting its ambition level. It also recommends the creation of a centralised accreditation scheme for external verifiers as well as introducing incentives “to enhance the growth of green bond issuance and the links with other sustainable financing instruments in a wider context”.

The EU-GBS should also feed into the work being launched in parallel by the European Commission on a potential EU Ecolabel for financial products. The label is to be voluntary and non-binding legally.

The taxonomy report sets out the basis for a future EU taxonomy in law. The EU taxonomy is a classification tool aimed at helping investors and companies identify low-carbon economic activities.

It can help support the transition towards a net zero 2050 economy, which an increasing number of member states is expected to support at the upcoming EU Council (20-21 June).

The 414-page report details a technical screening of 67 different economic activities which can make a substantial contribution to climate change mitigation objectives across agriculture, forestry, manufacturing, energy, transport, water, waste, and buildings.

The report calls for a stronger framework to monitor how the taxonomy is being applied so that taxonomy delivers what is needed, market observers stressed.

The new taxonomy report also includes a “do-no-significant-harm methodology”, which tackles the environmental and climate impact projects might have on other objectives.

Nuclear power is one example as it has clear emission mitigation benefits but yields great risks in terms of storage and waste.

“This is why investments into nuclear power are not recommended by the TEG,” explained Sandrine Dixson-Declѐve from Climate KIC and chairperson of TEG’s manufacturing assessment group. She also highlighted the construction of dams as they can have severe environmental side-effects.

[Edited by Zoran Radosavljevic]

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