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EU Taxonomy Map on Sustainable Finance

By Anthony Schilt - US Research Intern, Gen Advisory Pty Ltd


Key Insights


1. The taxonomy map action plan is important for underpinning several other elements of the EU’s sustainable finance policy framework, - such as green bond standards, corporate disclosure of climate-related information, and possibly even new sustainability-focused prudential regulation.


2. During the development of the EU Capital Markets Union in 2015, itself an attempt to address some flaws in European financial markets exposed by the 2008 crash and the following Eurozone debt crises, the need to similarly address the widening gap in needed low-carbon and sustainable finance was raised.


3. The Technical Expert Group (TEG) - which contains 35 members drawn from civil society, academia, business, and the finance sector - was given a mandate to begin developing technical criteria, beginning with the first objective: climate mitigation; throughout 2019, this issue has become a high priority to various industrial sector lobbyists increasingly concerned with ensuring that these thresholds favor their sector’s products.


4. The figure pictured below demonstrates the industry sectors of respondents, facing the TEG’s consultation on its first-round climate change mitigation criteria. The darker colors represent the most progressive industry sectors.


Summary

InfluenceMap, an independent organization providing data analysis on how business and finance affect the climate crisis, established a platform to track, assess, and score corporate and industry lobbying on climate change policy. During 2019-20, the organization expanded their platform to accommodate the European Union’s (EU) sustainable finance policy streams. This report will cover recent developments in Europe regarding their sustainable finance taxonomy.

Lobbying in the financial sector plays an integral role in Europe. In fact, in 2012, it was found that 129 finance sector organization actively engaged in the policymaking processes of the UK. Further, additional evidence has found other European policy outcomes that were clearly shaped by lobbying in the EU financial trade association.

The High-Level Expert Group on Sustainable Finance (HLEG) was founded in 2016. The Group recommended in 2018 that it was more than necessary to have “no less than a transformation of the entire financial system,” so the issues of climate change could best be addressed. The European Commission launched its own action plan during 2018 so it could start integrating sustainability into their financial policy.

One key component of their action plan was to develop a taxonomy providing common, science- based language to identify economic activities that contributed to the EU’s sustainable finance policy framework. Being a major legislative proposal for the European Parliament and Council, the taxonomy must first undergo its first two stages: level one, where the Commission gives their proposal and the Parliament and Council agree on its framework and principles; and, level two, where the Commission oversees the taxonomy’s technical details. Both stages are in progress.



Pictured below is a diagram illustrating how the taxonomy has developed as it passes through the EU’s institutions, accompanied by colored arrows that represent corporate engagement opportunities.

As the taxonomy developed, disagreements came to light, falling into one of two categories: conceptual arguments concerning level one regulation, and technical arguments concerning level two regulation.

The first conceptual argument around level one regulation concerns what form the taxonomy should take: (1) a stringent, binary “green” taxonomy for sustainable finance products; or (2) a more granular “brown-to-green” taxonomy covering all financial products. Other argumentative points focus on developing a “green” taxonomy as well as figuring how, and when, it could be expanded to cover social and governance issues.

For level two regulation, arguments arose over which activities should be included in the taxonomy, as well as what process will determine that. Otherwise, there is contention about whether the taxonomy should be mandatory or not.


In May 2018, the Commission’s Sustainable Finance Action plan settled on focusing the taxonomy toward classifying environmentally sustainable activities, rather than those that are not. To qualify as sustainable, an activity must substantially contribute to one of the six environmental goals: (1) climate mitigation; (2) climate adaption; (3) sustainable water and marine use; (4) circular economy; (5) pollution prevention; and (6) healthy ecosystems.

The figure above visualizes which financial groups are actively supporting the taxonomy’s development. They are pictured on the right; on the left are groups who have lobbied against the progressive, stringent policy.



Source

InfluenceMap. “The EU's Sustainable Finance Taxonomy.” Influencemap.org Home, influencemap.org/report/Who-s-Influencing-the-EU-s-Taxonomy- c78635abb8cf94597e0af16a5831275a.


***InfluenceMap also provides all figures included in this summary

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