Stockholm (NordSIP) – It was in July last year that the Platform on Sustainable Finance (PSF) first recommended extending the EU Green Taxonomy beyond ‘dark green’ activities, i.e., those with a ‘Substantial Contribution’ label. At that point, they proposed two more taxonomies, dubbing them ‘Significantly Harmful’ and ‘No Significant Impact’. “Feedback is essential as there are many trade-offs,” concluded the Chair of the PSF, Nathan Fabian of PRI, last summer, encouraging the investment community to get involved in the process of finetuning the proposals.
Since then, the experts of Subgroup 3 within the PSF, led by rapporteur Nancy Saich from the European Investment Bank, have been working diligently to improve on the initial draft and incorporate the feedback received. On 28 March, it was finally time to get a glimpse of the PSF’s final report, published the following day.
Getting used to the previously suggested ‘Significantly Harmful’ and ‘No Significant Impact’ labels and their acronyms turned out to be somewhat premature. The PSF has decided to scrap the duo (if not entirely the categories themselves), favouring a more holistic name for the new Taxonomy, the Extended Environmental Taxonomy (EET). However, much of the content, illustrated by colourful graphs and arrows, still looks familiar.
One conceptual difference in the final report worth highlighting is the decision to include all six environmental objectives and all parts of the economy in the EET. “The need for urgent transition cuts across all those objectives, looking at all sectors,” Saich points out. “Greening is needed everywhere.”
Ultimately, the proposal is to extend the Taxonomy framework to encompass the following activities, classified according to their current environmental performance, but also taking into consideration their potential transition pathways:
- Unsustainable performance requiring an urgent transition to avoid significant harm: These activities need to be improved urgently and could qualify for Taxonomic-recognised investment as part of a transition plan to avoid their current significantly harmful performance and move to intermediate performance levels.
- Intermediate (or Amber) performance: These activities operate between significantly harmful and substantial contribution performance levels and could qualify for Taxonomy-recognised investment as part of an intermediate/amber transition plan under which they continue to improve to stay out of significantly harmful performance.
- Unsustainable, significantly harmful performance where urgent, managed exit/decommissioning is required: These are activities that cannot be improved to avoid significant harm and will therefore remain always significantly harmful (ASH) and should be prioritised for Taxonomy-recognised transition investment as part of a decommissioning plan with a Just Transition effort.
- Low environmental impact (LEnvI) activities: These activities do not have a significant environmental impact and should not be regarded as either red, amber, or green. It should be possible for enterprises or entities to show that their overall activities, while not considered green, do not cause environmental or social harm. This classification should also encourage ‘LEnvI enterprises’ to access green Taxonomy-aligned finance for their green investments and expenditures.
The dynamic nature of the new EET framework might appear a bit complicated at first glance. Yet given time, the logic of the various transition pathways described rather pedagogically by the PSF experts should bring more clarity and help avoid the widespread ‘transition washing’ phenomenon.
Then again, as the PSF Chare Fabian wisely points out, “having the right tool and knowing how to use it are two very different things.” The pedagogical challenge remains. For now, let us see how the European Commission responds to the recommendation from the Platform and what the uptake is in the investment community.
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