Stockholm (NordSIP) – On March 19th, the Platform on Sustainable Finance published its Transition Finance Report. The report sought to answer six questions from the European Commission (EC) about the role of the taxonomy in facilitating the transition required by the EU’s ongoing climate change mitigation efforts.
The report provides three recommendations on how the Commission can improve the existing and future sustainable finance regulatory framework by (a) maximising inclusiveness of the current Taxonomy framework; (b) opportunities to develop the future Taxonomy framework; and (c) using (non-Taxonomy) policies and tools to further support transition finance. Clearly the EU Sustainable Finance Agenda is just getting started.
Maximising Current Taxonomy
The Platform recommends that the European Commission focus on six actions to maximise the inclusiveness of the current Taxonomy framework without neglecting its integrity. First, the Platform argues that the EC needs to increase its communication about how the taxonomy already supports transition finance.
Next, it lays out four paths for the Commission to ensure that reporting requirements enable companies, financiers and investors to communicate their transition plans. It should “ensure that the reporting requirement for banks under the Article 8 Delegated Act are carefully balanced to ensure that SMEs and households seeking access to green finance are – by extension – not overly burdened with information requirements.” The Platform also argues that the Commissions should provide a coherent view on sustainability reporting obligations under SFDR, Non-Finanical Reporting Directive (NFRD) and Taxonomy Regulation. It should also encourage companies to disclose their transition corporate strategies and to specify how the Taxonomy fits within these strategies and ensure that disclosure of Taxonomy-aligned CapEx is given equal importance as disclosure of taxonomy-aligned turnover.
Third, the Platform recommends that the Taxonomy should include more enabling activities across different sectors on energy efficiency that can be performed by any company as well as and more enabling that recognise the contribution of the entire supply chain. The fourth taxonomy maximising recommendation is for the EC to recognise activities that are part of an activity-specific investment plan to meet the Taxonomy criteria, through CapEx, OpEx and related finance.
The Platform also recommends more clarity be provided to stakeholders as to when new activities will be considered for inclusion in the Taxonomy and how they can engage with the Platform. Lastly, the Platform recommends updating the Delegated Act to ensure activities have consistent boundary descriptions and similar activities and are recognised consistently across different sectors.
Develop the Future Taxonomy
The Platform is also preliminarily considering four ideas on extending the current taxonomy by developing criteria for activities with no significant impact and for activities that cause significant harm. The Platform expressed the intention of providing initial recommendations on these topics by May 2021 and a final report by September 2021.
The Platform is considering the idea of identifying in the Taxonomy activities that could make a substantial contribution by stopping activities (through decommissioning or closure) that cannot improve to a level of performance better than significant harm. By defining these activities, companies and financiers can get recognition for these highly necessary transition efforts.
Another idea that the Platform is exploring the possibility to support significant improvements in performance of activities that aim at but do not reach the substantial contribution criteria, noting that recognising these efforts may help companies with reporting on their transition.
Other Policies and Tools
To further support transition finance, the Platform recommends exploring three policies and tools beyond the Taxonomy framework. On the topic of financial product labelling, the Platform recommends that the Commission confirm and explain the link between the forthcoming EU Green Bond Standard (EU GBS) and the Taxonomy. It also asks that the EC clarify how companies can voluntarily disclose the level of compliance of their green bonds with the Taxonomy, among other actions.
The Platform also suggests the Commission also establish activity-specific transition pathways based on Taxonomy criteria, to support companies to transition from significant harm to substantial contribution.
Finally, to allow companies to demonstrate their transition plans, the Platform recommends establishing and using other metrics than just Taxonomy-alignment percentage. Other metrics suggested by the Platform include TCFD metrics, science-based targets and sector pathways or transition scenarios or the requirements in the Climate Transition Benchmark to define climate transition on the company level.