The Future of the EU Taxonomy

    Stockholm (NordSIP) – The EU Taxonomy, the centrepiece of the union’s ambitious sustainable finance package, is lauded as the gold standard of green classifications. As such, this lexicon of sustainable activities has implications far beyond the old continent, informing and inspiring regulators worldwide. Yet, the EU Taxonomy is also still a work in progress.

    To assess the project’s current state and offer a glimpse into its near future, on 22 Mars, experts from the Climate Bonds initiative, the European Parliament, and partner organisations gathered for an intense discussion. NordSIP tuned in to gain some insights about the latest developments and efforts to optimise the EU Taxonomy uptake.

    Let science lead the way

    In his opening remarks, Sean Kidney, CEO and Co-founder of the Climate Bonds Initiative and an early advocate of the taxonomy idea, says he is proud of the work done so far in the EU. Summing up the state of the Taxonomy, he remarks, “Is it perfect – no. Is it powerful – definitely!” The key feature of the taxonomy to keep in mind is that it should stand on firm scientific grounds, reminds Kidney.

    “If you have a choice to listen to science or politicians, always listen to science,” concurs Sirpa Pietikainen, a Finnish Member of the European Parliament and one of the lead negotiators on the Taxonomy regulation. According to her, the Parliament and the Council essentially agree that the Taxonomy should be science-based, and the technical screening criteria outlined in the delegated act must align with the most recent climate science. If the taxonomy truly aspires to be a ‘gold standard’, economic activities should not be labelled sustainable simply because they are relatively better than others. They must live up to the scientific levels and targets needed to combat climate change.

    Do not kill your darlings

    The seasoned MEP is highly aware of the many compromises and shortcuts the taxonomy has been subject to. She admits jokingly feeling a bit like a desperate mother whose child has become a walking dead. What do you do, you can’t kill it, she says. It is a credible allegory, coming from her. Last year, Pietikainen and her fellow MEPs were indeed in a position to kill the European Commission’s proposal for a Complementary Delegated Act (CDA) over the controversial inclusion of nuclear energy and fossil gas in the taxonomy. The CDA passed through parliament, eventually, and the taxonomy lives on.

    Another point Pietikainen stresses is the need for a holistic view when classifying sustainable activities. She regrets the fact that, for the time being, there is no time or willingness to work further on the proposed social taxonomy. In the meantime, we must rely on the principle of ‘Do No Significant Harm’ (DNSH). “You can’t solve just one issue in isolation,” she says. “You can’t produce solar panels with child labour and call yourself sustainable.”

    The voice of experience

    Nadia Humphreys, Bloomberg Sustainable Finance Solutions, has long argued that the EU taxonomy must be usable to achieve its goals effectively. She shares some valuable lessons from the vantage point of her experience as an active member of the Platform on Sustainable Finance (PSF), both the first and the recently launched second iteration. She points out that in October last year, the PSF Data and Usability group also issued some recommendations for the future development of the taxonomy. The report’s main conclusion is similar; usability and compatibility should be high up on the regulators’ priority list.

    According to her, the implementation of the taxonomy is underway. More than half of the companies covered by the Non-Financial Reporting Directive (NFRD) have reported data for taxonomy eligibility. Many have even reported taxonomy alignment, which is not required of them yet, even if this includes firms who have reported zero alignment. Nevertheless, there are clear indications that extra guidance is necessary, as the practical implementation of the taxonomy is proving challenging for corporates, banks, and investment firms. Some of the issues are common for all user groups. Naturally, banks or asset managers face different challenges than non-financial companies.

    Humphreys floats an interesting idea that might appeal to asset managers with high sustainability ambitions. Currently, the reporting requirements clearly put the onus on ESG products and strategies. The extra burden of proving their sustainability claims might be counterproductive, disincentivising managers to launch this type of strategies. How about turning things around, and asking the same detailed sustainability reporting of everybody, wonders Humphreys.

    The webinar also offers the refreshing insights of a senior banker, Karin Lenhard, from Erste Group. She admits that, alongside other practitioners, she struggles with the taxonomy’s ‘soft requirements’, especially when interpreting the DNSH principle and the minimum safeguards. A bank always strives to be compliant, she asserts. Yet, how deep should we go? There are so many opportunities to fail, and the scrutiny is brutal, according to Lenhard. There is little recognition that the banks are on a learning curve, and many are quick to accuse them of greenwashing instead.

    Noblesse oblige

    Bridget Boulle, Director of Technical Development at the Climate Bonds Initiative, talks about the critical role of the EU Taxonomy as a model that other countries and regions aspire to and are inspired by. “With leadership comes responsibility,” she reminds. According to Boulle, the EU Taxonomy is still a leader regarding the granularity level. Technicalities can be challenging, however, and it is obvious that other taxonomies choose diverging paths. Some alignment between the different versions is possible and highly desirable, yet variations in local legislation and data accessibility make it difficult.

    For those involved in the future development of the EU Taxonomy, it is useful to consider that it sets the ambition level for regulators around the world, and that should keep them on their toes.



    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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