EU Taxonomy framework must evolve to support the transition towards a sustainable economy

Finance Watch commentary on the Platform on Sustainable Finance report on Taxonomy extension options supporting a sustainable transition linked to environmental objectives published on 29 March 2022.

Finance Watch supports the recommendations by the Platform on Sustainable Finance to further extend the EU Taxonomy framework. Sustainable finance is unlikely to fulfil its function of mobilising finance for transition enabling to meet the EU climate and other sustainability-related goals if the EU Taxonomy merely identifies economic activities that are already environmentally sustainable.

Achieving climate neutrality by 2050 requires a transition of the entire economy, especially those economic activities that are significantly harmful to the environment, and thus need to be urgently transformed or ceased in case transformation is not possible. Contrary to frequent misconceptions, this does not mean withdrawal of the financing of such activities, but rather channelling capital to companies that make the effort to transition such activities towards the intermediate “amber” category or environmentally sustainable “green” performance, thus recognising their efforts.

The Platform’s report is very balanced and rightly recognises that different sectors and different countries will have different starting points and different transition potential. It highlights that labelling every activity and every transition as green would be the wrong way to go about this as this would add little to clarifying the financing and economic transition needed to meet a given environmental objective.

As noted in the report, an extended Taxonomy framework offers the opportunity to inform the further development of sustainable finance policy instruments, e.g., by helping to define the non-green share of funds and credit portfolios. Recognising different environmental performance levels is also essential for financial market participants and supervisors to properly integrate sustainability considerations in the risk assessment framework.

In their respective responses to the Commission consultation on the renewed sustainable finance strategy of July 2021, the European Central Bank and the European Banking Authority[1] called for the development of a “brown” taxonomy as “a necessary complement to the green taxonomy from a prudential perspective”, “help supervisors to identify and manage climate and environmental risks” and “create new prudential tools, such as for exposures to carbon-intensive industries”, among others.

It is noteworthy that benefits of extending the EU Taxonomy to cover significantly harmful economic activities have been also recognised by the financial industry. In its statement of September 2021, the European Fund and Asset Management Association (EFAMA) described the “brown taxonomy” (now referred to as “red” following a traffic light system) as “an opportunity to transition away from significantly harmful activities” and further explained it “would allow asset managers to bring to market financial products that help the ‘hard-to-decarbonise’ sectors confront climate change and accelerate their necessary transformation”[2].

Last but not least, the Platform’s report launched today, makes the case for extending the EU Taxonomy framework to social objectives also, referring to the recently published Platform’s report on social taxonomy[3]. “Many activities have urgent reasons to be supported, accelerated and stepped up – such as vaccine development in response to a global pandemic; or support for elderly care (…).”[4]

Finance Watch believes that indeed recognising different levels of the environmental transition in the EU Taxonomy framework would facilitate creating consensus around the EU Taxonomy without compromising its integrity or its founding principles of technological neutrality and science-based approach. Extending the EU Taxonomy to social objectives would help mobilise finance needed to support the society in coping with social and economic impacts of the environmental transition as well as other societal challenges e.g., COVID or even the Ukrainian war.

ENDS

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