The EU Taxonomy In The International Context Of Sustainability Standards

The EU Taxonomy is the first joint, comprehensive and scientifically based assessment standard for green investments. However, the EU Taxonomy is not the only sustainability standard for classifying economic activities worldwide. Therefore, the question arises: How does the EU Taxonomy stand in international comparison with other sustainability taxonomies?

The EU Taxonomy

The EU Taxonomy measures the turnover and expenditure associated with an economic activity and thus assigns a sustainability score to the activities of companies. This enables investors to determine how environmentally responsible an investment in a company would be.

The two main objectives

Two main objectives are stated in the EU taxonomy:

  1. It is intended to provide official benchmarks and a general evaluation standard by which the market can measure green financial products. The EU Taxonomy applies to all financial products that are related to an environmental objective or environmental characteristics. This will allow investors to make more informed decisions. At the same time, it can reduce opportunities for greenwashing, which is considered one of the main barriers to promoting environmentally related financial products and investments.
  2. It should help increase investment in green economic activities needed to finance the transition to a carbon-neutral, circular, and more sustainable economy.

The six environmental goals

EU Taxonomy Environmental Objectives

The classification of economic activities is based on a reference framework of double conditionality. This means that, on the one hand, a company's economic activities must make a significant contribution to one of the EU's six official environmental objectives (see figure), and on the other hand, they must not significantly compromise other environmental or social objectives.

China's Green Bond Catalogue

The People's Bank of China published the so-called "Green Bond Catalogue" in 2015, which supports the issuance of green bonds and is referred to as the Chinese taxonomy. It contains official requirements for classifying projects as green, for managing revenues and reporting, and a taxonomy in the form of a Green Bond Endorsed Project Catalogue. Targeted at financial institutions, the Catalogue defines eligible green projects and provides guidance for project classification in the following six environmental areas:

  • Energy saving
  • Pollution prevention and control
  • Resource conservation and recycling
  • Clean transportation
  • Green energy
  • Environmental protection and adaptation to climate change

In addition, China has established a "Green Industries Guide," which was last updated in 2019. For lending, the China Banking Regulatory Commission has issued guidelines for green loans, performance indicators and reporting forms.

The Common Ground Taxonomy of the EU and China

"Fostering global ambition" is one of the key elements of the EU Sustainable Finance Strategy, published by the EU Commission in July 2021. Among other things, the EU intends to develop common goals and guidelines for sustainability taxonomies with other countries. In addition, the comparability and coherence of parameters and thresholds of different taxonomies are intended to be improved. The International Platform on Sustainable Finance (IPSF) is currently working on the so-called "Common Ground Taxonomy". This is a uniform ground taxonomy that compares similarities and differences between the EU taxonomy and the Chinese taxonomies. By January 14, 2022, the IPSF consulted a comprehensive comparison table with technical evaluation criteria on about 80 economic activities.

Other International Approaches to Sustainability Taxonomies

In addition to the EU and China, about 20 countries and regions have developed or begun to develop approaches to green, social, or transition taxonomies in recent years. However, most of these have not yet been translated into legislative initiatives.
These include, for example, the following countries:

  • The Netherlands have had green credit legislation since 1995.
  • France created the GreenFin label for retail investment funds in 2015.
  • Japan's Ministry of Environment issued guidelines for green bonds in 2017.
  • The UK Green Technical Advisory Group was commissioned to review the metrics of the EU taxonomy to adapt them to the UK market.
  • In Canada, work is underway to develop a Transition Taxonomy. The Canadian Standards Association Technical Committee for Sustainable Finance aims to develop a taxonomy based on the EU taxonomy. However, its development was paused in April 2022 due to "fundamental differences in opinions" among the relevant committee members.

Other countries that have expressed interest in taxonomies for sustainable finance include Canada, Chile, Colombia, Kazakhstan and the ASEAN region. A large number of them plan to use the EU taxonomy as a basis for developing their own taxonomies.

The Pioneering Role of the EU Taxonomy

The EU Taxonomy, also called the Green Taxonomy, is a model for classification systems in many other countries because the EU Taxonomy is the first complete, legally binding benchmark for green investments. As a result, it is also considered the most advanced classification system. Furthermore, since many of the other global taxonomies are still in the development phase, many countries are using the EU benchmarks as a guide. Many of these countries have assessed the EU criteria and are taking them into account when building their frameworks, making the EU taxonomy a major influence on other sustainability standards.

Due to the high degree of interdependence of capital markets and economic supply chains worldwide, disclosure requirements for issuers of financial products and companies in the EU also influence international actors. Therefore, the EU Taxonomy also impacts non-EU countries, although it was not initially developed with the aim of obligating third countries with regard to their own sustainability activities.

Globally Uniform Standards?

The development of an increasing number of national and regional sustainability standards leads to the question of a global standard. This is particularly important as there is currently a lack of comparison between the different frameworks in the respective jurisdictions. Comparability will allow market participants to better understand the individual taxonomies, promote consistency, and highlight opportunities for collaboration. Fragmented approaches, on the other hand, can increase transaction costs and stifle international capital flows.
The discussion on internationally uniform sustainability standards will certainly be interesting - especially in view of the already strongly diverging positions in the EU, for example on the topic of nuclear energy. It remains to be seen to what extent sustainability taxonomies will be harmonized worldwide.

Sources:

Nächste Station: Einheitliche Taxonomie für nachhaltige Investitionen? - Bankenverband

Sustainable finance definitions and taxonomies in China | Developing Sustainable Finance Definitions and Taxonomies | OECD iLibrary (oecd-ilibrary.org)

Global den Ton angeben – Die EU-Klassifizierung für nachhaltige Wirtschaftsaktivitäten | The Market

People's Bank of China Green Bond Endorsed Project Catalogue (2020 Edition) | Green Finance Platform

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