European Commission Publishes First Details of EU Taxonomy

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Stockholm (NordSIP) – On Friday, November 20, the EU Commission published the first draft delegated act on the EU Taxonomy, the bloc’s classification system for sustainable economic activities.

To hear more about the details of the EU Taxonomy, we reached out to Anne Kristin Kästner, Sustainability Specialist at SEB, who told us about the changes the Commission has made to the TEG’s recommendations. SEB is part of the EU Platform on Sustainable Finance that works – amongst other things – on recommendations for new criteria for the Taxonomy.

What’s going on?

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“Delegated acts” are a type of legally binding EU rule through which the European Commission can supplement or amend non‑essential parts of EU legislative acts. The Commission can adopt the delegated act and if the European Parliament and EU Council have no objections, it enters into force.

A draft delegated act is normally published by the Commission at the start of a consultation process which culminates with the formal adoption of the delegated act. Interested parties can provide their feedback on this draft delegated act on the European Commission’s official website.

In this case, the delegated act is being used to define detailed aspects of the EU Taxonomy. The delegated act, once it is adopted, will provide the first official list of sustainable economic activities valid across the EU.

The adoption of the Taxonomy regulation as European law in July 2020 completed a process that started in March 2018 and was informed by the Technical Expert Group on Sustainable Finance’s (TEG) recommendations on sustainability categorisations and screening criteria. The public consultation launched by the publication of this first draft delegated act will run until the end of December. In June 2021, the Commission is also scheduled to adopt a delegated act describing disclosure obligations for companies, ahead of another such act describing more screening criteria and economic activities due at the end of 2021. The Taxonomy will be applied from January 1, 2022.

 A Common Standard

“The Taxonomy is the first classification system of sustainable economic activities in the European Union,” Kästner says. “Until now, there was no common view on which economic activities are in line with the Paris agreement and the EU’s objective of being the first climate-neutral continent by 2050.” This lack of a collectively agreed upon standard hindered investments and slowed down the progress towards the EU’s collective environmental goals.

The Taxonomy gives investors that common definition according to Kästner and it will be the base for other sustainable finance regulation in the EU, with the overarching objective to live up to the Paris agreement. “The classification system breaks down this objective into concrete technical screening criteria for specific economic activities, for example defining the tailpipe emissions a car is allowed to emit in order to be sustainable. That does not mean that all other sustainability certifications are not valid anymore, they can co-exist with the Taxonomy,” she adds.

“The Taxonomy will increase transparency in the financial market by requiring large companies and financial actors to disclose how aligned their activities and products are with the EU definition from January 1st, 2022,” she explains. “However, the purpose of the Taxonomy reaches far beyond a disclosure requirement. It is part of the EU Action Plan on Sustainable Finance that seeks to shift capital flows to finance the transition towards a low-carbon economy.”

The Delegated Act Changes

“As expected, the draft delegated act (DA) is in many parts based on the final recommendations of the TEG,” Kästner says. “However, the DA introduces several new economic activities. The entire shipping sector, low carbon airport operations and electricity generation from liquid fuels, that were not included in the TEG recommendations, now have screening criteria.”

“During the last week, the change in the criteria for Acquisition and ownership of buildings has been widely discussed in the Nordics. An existing building must have at least Energy Performance Certificate (EPC) class A to be sustainable, a criterion that many in the Swedish real estate sector say is very strict and incentivizes new construction instead of renovation. These are just some examples, there are many other changes compared to the TEG report,” she adds.

The Nordic Taxonomy Perspective

“It is hard to say whether Nordic companies are better prepared for the Taxonomy disclosure requirement than European competitors,” Kästner says. ”However, since summer 2019, SEB has been developing a quantitative Taxonomy model that estimates the alignment of activities with the regulation. According to our research with the model, the Nordic markets do have a bit higher alignment than other regions. That means, that companies engage a bit more in sustainable activities in the Nordics. However, total Taxonomy alignment is today fairly low in all regions (under 5% of total revenues according to SEB’s Taxonomy model).”

The next steps for companies, including SEB, will be to focus on the integration and alignment of their business process with the Taxonomy. “Firstly, SEB shall report its Taxonomy alignment as a financial company, so we have to prepare for that. Secondly, some of our customers’ business will be affected by the regulation and therefore so will we. We are working on integrating the Taxonomy into our processes and decision-making, not only on the investment but also on the credit side. This enables us to assess the impact of our investments and financing, as well as the risks,” she says.

Challenges Ahead

“Based on our discussions with investors, the main challenge is to understand the Taxonomy fully and to prepare for the upcoming disclosure obligations,” Kästner argues. “The current lack of sustainability data makes the assessment of Taxonomy alignment very difficult. Moreover, many investment products, sustainable and non-sustainable products alike, have low Taxonomy alignment today, which will likely be a challenge to communicate to end clients.”

Ultimately, Kästner emphasises that the whole process might be made easier if we bear in mind its goal. “It is therefore important to understand that the technical screening criteria are meant to be aligned with the Paris Agreement. Not many products will be very green today, because our economy is not in line with our ambitions (yet) and the Taxonomy is meant to show where we need to invest more in order to transition. Overall, the Taxonomy can be a fantastic tool for sustainable investments,” she concludes.

Image courtesy of SEB

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