Hereafter the highlights of one of the two position papers we will join to the answer to European Commission public consultation about the Renewed Sustainable Finance strategy.
The first words of the Technical Expert Group (TEG) final report released in March 2020 defines the EU Taxonomy as “a tool to help investors, companies, issuers and project promoters navigate the transition to a low-carbon, resilient and resource-efficient economy”.
Does the framework under implementation really keep this promise?
The first objective of European Commission action plan released in March 2018 was “to reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth”.
According to Collins Dictionary, to reorient means “to adjust or align (something) in a new or different way”. But actions 1 to 5 dedicated to this objective in the action plan, only focused at the sustainable side of this question. And the action 1, related to the establishment of an EU classification system for sustainable activities, has the same bias.
Without being caricatural, the approach could be compared to a public policy which would aim at building a sustainable agriculture by focusing only on the definition of what could be a perfect permaculture.
Yet, the role of transitioning and enabling activities will be key to reach the environmental and sustainability goals, both at the EU and global level. Focusing only on already “best in class” companies and excluding companies based on existing activities is likely to be very insufficient to reach sustainability goals and could ultimately exclude some sectors that are dependent on excluded activities.
And reorient capital flows towards sustainable investments means also to shift it away from unsustainable financing, e.g those which don’t comply with Paris targets agreement and more generally with the Sustainable Development Goals (SDGs). This implies to define some sort of “brown” taxonomy, keeping in mind that many shades of brown will coexist for a while in our economies.
In practice, the Commission should determine a more granular approach (with several thresholds), which will determine a transition pathway for each sector and hence allow the economy and the markets to reward compagnies that engage on this pathway. The purpose is clearly not to implement punitive legislations, but help all stakeholders to work together to contribute to the transition.
Due to the complexity and highly technical nature of developing such a classification system, it will take time to arrive at a fully-fledged EU sustainability taxonomy, covering climate, environment and social aspects.
And it will be essential, first in the drafting of the two delegated acts, second in the steering of the “Platform on Sustainable Finance”, to keep in mind that the tools must be workable.
This workability is a condition to be in a position to use this tool in the various labels under construction, whether we speak of sustainable bonds, loans or other financial products.
And not only:
On various aspects of sustainable finance, the capacity for the EU to take the leadership is relatively clear. This is the case on the question of internalization of carbon pricing or on the non-financial disclosure’s legislation.
This is probably less clear at this stage on the taxonomy aspects, and prioritizing and mobilizing the International Platform on Sustainable Finance to its full potential will only be possible if the EU Taxonomy framework is convincing and, again, workable.
Iconography: High angle view of the Temperate House at Kew Gardens, Richmond, England, United Kingdom © Nick Page
After working as an international banker for emerging countries, Laurent Lascols became global head of country risk / sovereign risk (from 2008 to 2013) then global director of public affairs (from 2014 to 2019) for Societe Generale. In 2021, he founded Aristote, an advisory firm and training organization dedicated to environmental economics, sustainable finance and impact finance.