IISD’s Reflections on an EU Taxonomy for Sustainable Finance: A strong start with great potential

ISD responded to the public consultation on the EU’s new taxonomy on sustainable finance in late February 2019, issuing recommendations for how to improve the taxonomy’s usability and ensure that it is “fit for purpose” relative to its objectives. 

The taxonomy is part of the European Commission’s Action Plan on Sustainable Finance, which was released in 2018. The Action Plan and associated taxonomy are designed to make it easier for private sector actors to direct money toward sustainable investments, thus supporting the EU’s efforts to achieve the Sustainable Development Goals (SDGs) and the bloc’s pledges under the Paris Agreement on climate change. 

Here’s what we thought:

The Technical Expert Group on Sustainable Finance (TEG) that is tasked with developing the taxonomy has made a promising start: however, there is still much work to be done for the taxonomy to serve as a clear, consistent, and complete product that private sector actors can use effectively. 

The need for a clear taxonomy

Through its Action Plan on Sustainable Finance and the legislative proposals that followed in 2018, the European Commission made a promise to financial market participants: that a taxonomy would provide clarity on which economic activities in green sectors are imperative for the transition to a low-carbon, climate resilient and environmentally sustainable economy.

IISD welcomes the EU’s leadership in working to build a more transparent and efficient market. The taxonomy has the potential to provide valuable certainty and confidence to financial market participants, which in turn will strengthen the EU’s green competitiveness.

A clear taxonomy would provide market participants with the tools to distinguish between green assets and non-green assets and allocate capital efficiently. The current version of the taxonomy, while aligned with this goal, still has some room for improvement. 

Currently, the taxonomy’s scope, purpose and potential application are difficult to comprehend at first glance. For example, it is not clear which attributes would allow an economic activity to qualify as “green” under the taxonomy. The current drafting leaves some worrisome ambiguity over whether this “green” qualification would apply to activities with low environmental footprints, or instead to those activities that have the potential to transform the sector in which they take place, in turn reducing the sector’s high environmental footprint.

The TEG should make sure that there is little space for misinterpreting and misusing the taxonomy, thus ensuring that this valuable tool will be effective in practice. 

Supporting investors in choosing “green” activities: How IISD can help

IISD and the MAVA Foundation offer the use of a Sustainable Asset Valuation (SAVi) approach that could complement the taxonomy. While the taxonomy, if improved, could make it easier for investors to identify which activities qualify as “green,” SAVi can help these same investors assess the financial viability of sustainable infrastructure projects and portfolios. 

SAVi is a simulation and valuation tool that IISD and the MAVA Foundation have designed for use on infrastructure assets, helping prospective investors map out the trade-offs that must be addressed so that an infrastructure asset can contribute effectively to making the transition to a low-carbon, resilient economy. SAVi also identifies environmental, social and governance (ESG) and climate risks, as well positive and negative externalities, so that investors can avoid costly surprises before, during and after the project lifecycle.