EU negotiators yesterday reached a provisional deal on a framework for a taxonomy of environmentally sustainable activities, which is set to form the basis on which investors marketing financial products will have to back up any environmental sustainability claims.

The agreement was reached between national envoys and a team from the European Parliament, and is subject to approval by the European Parliament and EU Council. Representatives of EU member state governments in the Coreper body are due to meet soon to examine the compromise.

The taxonomy is a major part of the European Commission’s sustainable finance action plan, and the regulation for it is the last of the Commission’s three legislative proposals from May 2018 that needs to be finalised.

The taxonomy, or a “green list”, as Commission executive vice president Valdis Dombrovskis has now described it, is a system to determine whether an economic activity contributes to certain environmental objectives and “does no harm” to others. Dombrovskis says it will help pave the way for massive investment supporting the move to a climate neutral EU economy by 2050.

Dombrovskis said: “I am delighted that we were able to reach this compromise… Today’s common understanding is fully in line with the increased ambition of the new Commission on financing the green transition.”

The taxonomy is also backed as a tool to prevent “greenwashing”.

Reporting demands

The deal at trialogue level follows months of discussions and disagreements on various aspects of the taxonomy. One of the points of debate has been with regard to investor disclosure requirements.

According to Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group in the European Parliament, under yesterday’s agreement “all financial products are obliged to apply the classification or clearly state that they do not”.

Sébastien Godinot, economist with WWF European policy office, said the negotiators had found “balanced compromises on sticky issues like disclosure” and that there would be mandatory and separate disclosure for the share of three types of activities in financial products: “sustainable”, “transition”, and “enabling”.

Transition activities refer to current best practice in sectors with no zero carbon alternative yet, like steel, and enabling activities support zero-carbon sectors, with wind turbine manufacturing as an example.

Tanguy van de Werve, director general of Efama, the trade association for the European asset management industry, expressed a recurring investor plea for policymakers to act on corporate reporting to allow investors to meet reporting requirements being imposed on them.

“It is crucial that investee companies are required to disclose all key data needed to evaluate the investment against the EU taxonomy” Tanguy van de Werve, director general of Efama

“Robust and publicly available ESG disclosures on investee companies are a prerequisite to make EU taxonomy work in practice, especially in view of the scope of the disclosure requirements being enlarged to include all financial products,” said Van de Werve.

“It is therefore crucial that investee companies are required to disclose all key data needed to evaluate the investment against the EU taxonomy.”

Some others argue that investors can get the data they need without non-financial corporate reporting being made mandatory.

According to Giegold, however, corporates will also face reporting duties in the context of the taxonomy regulation.

“The obligation to disclose the share of sustainable activities applies not only to sustainable financial products but also to very large companies,” he wrote in comments yesterday evening.

‘Generational shift’

“It is an absolute measure and therefore represents a generational shift for responsible investment” Fiona Reynolds, CEO of the Principles for Responsible Investment

Fiona Reynolds, CEO of the Principles for Responsible Investment (PRI), said the organisation “strongly welcomes” the provisional agreement on the taxonomy.

Underpinned by disclosure requirements, the taxonomy was a system “to bridge the gap between sustainability goals, like the Paris climate agreement, and investment practice,” she said.

“It is an absolute measure (the economic activity is consistent with sustainability goals), rather than a comparison (the economic activity is a relative improvement on the status quo), and therefore represents a generational shift for responsible investment,” she added.

Nuclear out?

The status of nuclear energy has been a contentious point in the discussions about the taxonomy. France was reportedly in favour of it making the cut in the taxonomy, with the European Parliament and Austria, Germany and Luxembourg pushing back.

“The question of the sustainability of nuclear power was a hurdle in the negotiations until the end,” said the Greens’ Giegold.

He portrayed nuclear energy as being “de facto” prevented from counting as a environmentally sustainable activity because of the “do no harm” principles.

The baseline logic of the taxonomy has been described as involving two questions. The first, according to Andreas Hoepner, professor at University College Dublin and an independent member of the technical expert group advising the Commission on sustainble finance, is whether an activity can be executed “in a green manner”. The second is about thresholds, such as CO2 emission limits for electricity generation, that such as an activity has to meet to count as green.

These thresholds are still to be decided and, according to a statement from the Greens/EFA, they will be prepared by “a balanced platform of experts”.