EBF SUSTAINABLE FINANCE ROUNDUP ARTICLE 

Taxonomy as a transition tool: Interview with Daniel Bouzas Luis, Regional Coordinator for Europe at UNEP FI

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BRUSSELS, 30 November 2021

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The views, thoughts, and opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee, or other group or individual.

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The EU Taxonomy is a classification scheme that aims to provide clear and science-based definitions of what economic activities could be considered environmentally sustainable (“green”). It has been designed to identify and target activities with a substantial positive contribution to environmental objectives, thus the thresholds to define “what is green” are rather demanding and in several instances go beyond the existing sectoral legislation – which is expected to be revised over time. The Taxonomy is, however, not a mandatory list of activities in which to invest. It also does not suggest that what is not considered as Taxonomy aligned, which currently is the vast majority of the EU economy, is unsustainable. However, there is no further differentiation of non-aligned activities. While the taxonomy defines what is “green” there is no distinction between activities/companies that have a credible transition path (“greening”)  from others that have not yet adapted their business strategies to tackle the challenges to reach a Net-Zero European Economy by 2050, as addressed by the EBF in March 2021.

Labelled initially as a “dictionary and disclosure tool” to provide clarity mainly for investors, with time, the EU Taxonomy is growing both in scope and ambition as a tool to deliver on the European Green Deal. The taxonomy is now going to be mandatory also for banks that will have to report the extent to which their activities are taxonomy aligned.

The United Nations Environment Programme Finance Initiative (UNEP FI) and the European Banking Federation (EBF) are collaborating on a report that aims to facilitate banks in their efforts to apply the EU Taxonomy to their lending activities.

In our interview with Daniel Bouzas Luis, Regional Coordinator for Europe at UNEP FI, we asked Daniel about his views on the EU Taxonomy and whether and how it can be employed as a “transition tool”.

Could the EU Taxonomy be used to engage companies whose activities are not aligned with the Taxonomy?

The first objective of the Taxonomy was to tackle greenwashing. With common definitions on what can be considered environmentally sustainable and specific ways for companies to report, the Taxonomy is expected to improve reporting as it is simultaneously a classification and a reporting tool. As a framework, it provides clarity to companies in determining, on a scientific basis, whether their activities have a significantly positive environmental impact.

The Taxonomy is one very specific way of looking at what a company’s current performance looks like, as it generates a very specific activity per activity overview but can also be used as a tool to plan improvements. A full alignment with the taxonomy provides the highest-level performance a company can aim for to be aligned with the environmental goals of the European Commission – for those activities that are in the scope of the taxonomy (eligible activities). In fact, the Taxonomy technical screening criteria (TSC) indicate how a green and sustainable Europe should look like in the future and allow companies to adjust their strategies with the EU objectives. More precisely, it forces companies to take a deeper look at their activities in a scientific way and assess their impact on the environment. This is crucial in determining a credible transition pathway – assessing where the performance is up to the standard, where it needs to be improved and how. The increased clarity benefits banks as a result as well, as they too adjust their financing activities towards their own sustainability targets.

How do the technical screening criteria (TSC) and ‘do no significant harm’ (DNSH) aspects of the current Taxonomy fit into the transition framework?

The Taxonomy will be developed for six environmental objectives: climate change mitigation, climate change adaptation, the sustainable use and protection of water and marine resources, the transition to a circular economy, and pollution prevention and control. The TSC for each objective are then being designed as the “golden standard” thresholds and metrics to provide clear direction for companies to develop pathways towards aligning with the 2050 targets the EU and its Member States have committed to (as per the Green Deal, Climate Law, etc.).

It is, however, also important to keep in mind that many companies will require an intermediate target for their activities as a stepping stone on their way to aligning with 2050 targets.

From a financial institution’s perspective, the taxonomy could be seen as a tool to engage with their customer on their transition pathway – to align with the EU objectives – thus mitigating the transition risk both for the customer and for the bank.

What do you make of the Platform on Sustainable Finance’s recommendation to expand the current Taxonomy?

With the focus on the highest level of environmental performance, we are missing a wide range of activities that cannot be considered green but neither harmful. With the expansion of the Taxonomy to cover all economic activities, we will be able to understand the improvements in the performance of activities. However, it is a complex task with many open questions such as whether, for instance, minimum social safeguards (MSSs) will be assessed for this intermediate category and whether the benefits of tracking the movements within the “middle category” of activities with no significant environmental impact would outweigh the possible cost. On the other hand, to enable the transition of those activities that can improve their environmental performance, we will need to develop a system to understand whether such activities are on a credible transition pathway.

How do you assess the readiness of banks to engage in this process with their clients?

Many banks across Europe are already engaging with their clients with regards to how they are performing against specific environmental targets. In this respect, the Taxonomy represents a common tool that determines, in an objective way and based on a scientific approach, which activities are in line with the 2050 net-zero objectives.  This ultimately will facilitate banks’ engagement and ensure the allocation of finance to activities with a truly positive impact.

At UNEP FI we will continue supporting our members in the implementation of the Principles for Responsible Banking, their Net-zero commitments under the Net-Zero Banking Alliance, but we will also continue providing them with key tools as not to only enable them to comply with regulatory requirements, but also benefit in the long term. I believe that with EBF we have a shared objective here and we look forward to our continued cooperation.

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