EC welcomed the report from the Platform on Sustainable Finance that offers recommendations for strengthening the potential of transition financing through the Taxonomy criteria. EC plans to consider this advice when finalizing the draft delegated act on climate mitigation and climate adaptation, in the context of the Taxonomy Regulation, and when preparing its Renewed Sustainable Finance Strategy and other sustainable-finance related initiatives. This input from the Platform is a result of the EC request, in January 2021, to provide further input on how the Taxonomy framework and the existing sustainable finance framework, more broadly, can facilitate all companies in their transition toward improving their environmental performance.
In answering the six questions from EC, the Platform makes recommendations that fall into three broad categories that involve maximizing inclusiveness but maintaining integrity of the current Taxonomy framework; focusing on opportunities to develop the future Taxonomy framework; and utilizing other (non-Taxonomy) policies and tools to further support transition finance. In the report, the Platform recommends exploring the following policies and tools beyond the Taxonomy framework:
- The Platform recommends for EC to confirm and explain the link between the forthcoming EU Green Bond Standard and the Taxonomy as well as to indicate whether Taxonomy disclosure obligations might be extended to other financial instrument, such as bonds. The Platform also recommends that consideration be given to grandfathering arrangements for labels, as many investments will extend beyond the time within which the Taxonomy criteria are tightened.
- To support companies to transition from significant harm to substantial contribution, the Platform recommends considering using the Taxonomy criteria to establish transition pathways for certain environmental performance levels that could be applied to specific economic activities. Performance of the activity would have to improve to substantial contribution over the defined transition timeframe.
- To allow companies to demonstrate their transition plans, the Platform recommends establishing and using metrics other than just Taxonomy-alignment percentage—for example, Taskforce on Climate-Related Financial Disclosure (TCFD) metrics, science-based targets and sector pathways, or transition scenarios. The Platform recommends using the requirements in the Climate Transition Benchmark to define climate transition on company level.
While the details of the Taxonomy reporting requirements are still being resolved, the Platform already sees several opportunities and challenges in this area that can be considered to better support transition finance. The Platform recommends for EC to:
- ensure that the reporting requirement for banks are carefully balanced to ensure that SMEs and households seeking access to green finance are—by extension—not overly burdened with information requirements.
- provide a coherent view on sustainability reporting obligations under the Regulation on Sustainability-Related Disclosures in the Financial Services Sector (SFDR), the Non-Financial Reporting Directive (NFRD), and the Taxonomy Regulation.
- encourage companies to disclose their transition corporate strategies and to specify how the Taxonomy fits within these strategies.
- ensure that disclosure of Taxonomy-aligned CapEx is given equal importance in comparison with the disclosure of taxonomy-aligned turnover.
The report also states that the Platform is considering the potential pros and cons of extending the scope of the Taxonomy to define activities that have no significant impact on the Taxonomy’s environmental objectives. Clarity on what activities have little or no impact could help companies and financiers to make investment decisions toward the transition. In addition, the Platform is exploring the extension of the scope of the Taxonomy to define activities that significantly harm the Taxonomy’s environmental objectives. This could be an important tool for the transition, as it would identify activities and performance levels that companies, financiers, and others must move away from. For both these tasks, the Platform will provide initial recommendations by May 2021 and a final report by September 2021.
Keywords: Europe, EU, Banking, Securities, Sustainable Finance, Climate Change Risk, ESG, Green Deal, Reporting, Disclosures, SFDR, Taxonomy Regulation, NFRD, EC
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