The final report on EU Taxonomy, developed by the Technical Expert Group (TEG) on Sustainable Finance, has been made public on 9th of March 2020. Firstly launched in June 2018 and then modified according to a double round of stakeholders feedback, the report represents a set of recommendations to the overarching design of the Taxonomy, as well as a guidance on how companies and financial institutions can make disclosures using the taxonomy.
The Taxonomy Regulation (TR), agreed at political level in December 2019, creates a legal basis for EU Taxonomy. The EU Parliament has already formulated its position on the legislative proposal with respect to Taxonomy. By the end of next year, the European Commission shall finalize the so called “Climate Taxonomy”, while by 2021 the Taxonomy for all environmental objectives shall be launched.
The work delivered by the TEG represents the first benchmark methodology to support the recommendations on the technical screening criteria, allowing to classify economic activities according to their impact on environmental objectives set by the EU.
The concept of EU Taxonomy
Taxonomy is, in a broad sense, the science of classification. EU Taxonomy also comes up to this: it is a global benchmark for economic activities to be considered economically sustainableand in line with six environmental objectives related to the EU environmental goals for 2050, notably:
- Climate change mitigation;
- Climate change adaptation;
- Sustainable and protection of water and marine resources;
- Transition to a circular economy;
- Pollution prevention and control;
- Protection and restoration of biodiversity and ecosystems.
To be included in the proposed EU Taxonomy, an economic activity must contribute substantially to at least one environmental objective, and do “no significant harm” to the other five environmental objectives set out in the legislative proposal
The Taxonomy will serve as common language for investment activities across the EU, making sustainable finance more popular and widespread across investors, hence making it possible to finance the transition towards climate neutral EU by 2050. The EU intends, by setting up clear standards and rules for investors, to make sustainable and green investments attractive for investors. The idea behind it is in fact that sustainable finance should mobilize also private investments and do not depend exclusively on institutional investors and public funding.
What about the Green Deal?
The Taxonomy also plays a crucial role in Europe’s ‘Green Deal’ implementation, as it will help to attract billions of euros needed for the sustainable transition and to achieve carbon neutrality by 2050.
The European Green Deal Investment Plan aims to create an attractive framework for private investors and the public sector to facilitate sustainable investments. In this context, the EU taxonomy will feed into the InvestEU (fund mobilising public and private investment using an EU budget guarantee) climate tracking methodology that will be used by the InvestEU Implementing Partners (main partner is the EIB, but other institutions that can get involved are national promotional banks and international financial institutions).
Beyond the Green Deal, Taxonomy is also expected to be put into use by the European Central Bank. ECB President, Christine Lagarde, indeed declared during a hearing at the EP Economic Committee in September 2019 that there would be “no reasons why the EU Taxonomy should not become part of the European Central Bank regulations”. The EU Taxonomy is valuable tool to integrate climate change variables in economic activities evaluation and could represents a point of departure for the development of macroeconomic evaluations, such those implemented by the ECB.
The role of green bonds
Once the benchmark and basic set of rules for sustainable investments are set, the basic question that EU Taxonomy triggers is: how do we finance sustainable investments in practice? EIB Sustainability Funding expert Dominika Rosolowska sustains, interviewed at COP24 2018, that this mostly happens via capital markets (as the InvestEU Fund and EU Taxonomy missions seem to confirm) where Green Bonds are sold and exchanged. Green Bonds are designated bonds intended to encourage sustainability and to support climate-related or other types of special environmental projects. The EIB itself issues Green Bonds (also called “Climate Awareness Bonds”) that are financing environmental friendly and sustainable projects across Europe, including projects focused on buildings sustainability.
Beyond EIB’s experience, the challenge for Europe is still to make green bonds a trustable, recognized and marketable financial products. This is why the TEG has also worked on the Green Bonds issue, firstly proposing a voluntary EU Green Bonds Standard in the EU Green Bonds Standard Report (published in June 2019): the Report provides a clearly defined protocol for issuing green bonds and gives the opportunity to the investors to make investments in green bonds that are credible and easier to report on. The TEG has also drafted a Usability Guide on EU Green Bonds, published in March 2020. This guide offers issuers an opportunity to launch taxonomy-aligned green bonds at a potentially lower cost of capital.
Importance of the building sector
In the EU Taxonomy technical screening criteria for substantial contribution to climate change mitigation, economic activity in the building sector is differentiated according to its scope and is divided in four sub-categories:
- Construction of new buildings;
- Building renovation;
- Individual renovation measures (installation of renewables on site and other professional, scientific and technical activities;
- Acquisition and ownership of buildings.
Building renovation and buildings construction are recognised to have the potential to meet all six objectives and to give substantial contribution to climate adaptation.
The building sector is hence recognized to be strategic for meeting the 2050 carbon neutrality goal. However, the fact of being included in the EU Taxonomy regulation alone does not solve the issue: investments in buildings energy efficiency have to be unlock. Funding and project aggregation, data reliability and innovative financing schemes are some of the main aspects to be enhanced when looking for investors for building energy efficiency projects
Many H2020 funded projects are proposing innovative tools and methodologies to finance and de-risk investments in buildings energy efficiency, such as the project QUEST (involving REHVA as project partner), aiming to de-risk investments in energy efficient buildings by the application to the financial evaluation of the investment of a quality management based methodology, or the project ALDREN (also in partnership with REHVA), delivering an EVCS -European Voluntary Certification Schemes enhancing the transparent communication to investors of certain performance indicators.