11 December 2020

EFAMA’s ANSWER TO THE JRC CONSULTATION ON THE 3RD TECHNICAL REPORT ON DEVELOPMENT OF EU ECOLABEL CRITERIA FOR RETAIL FINANCIAL PRODUCTS

We believe the 3rd technical report strikes a better balance between the strictness of criteria and a sufficiently large pool of investment opportunities, and present the following recommendations:

A. The use of CapEx in the portfolio greenness formula

Funding of a just transition is a priority of EU´s Green Deal and we believe this is sufficiently reflected also in the portfolio greenness formula. The 60:40 ratio for weighting Turnover and CapEx is fully commensurate with the need to incentivize new investments. We also commend JRC´s efforts to develop a formula that does not treat these two indicators in isolation, providing a holistic view of a company´s Taxonomy alignment.
However, asset managers are aware of the greenwashing risks that the inclusion of “projected CapEx” and “green revenue growth” may create. The use of different CapEx timeframes or definitions in the Ecolabel, when compared to the information disclosed under Article 8 of the Taxonomy Regulation (TR), would introduce unnecessary complexity. To address these uncertainties, we propose that JRC´s formula includes CapEx on the basis of reporting requirements under Article 8 of the TR. We believe this harmonized treatment of CapEx would close many loopholes and strengthen the integrity of the EU Ecolabel.

B. Thresholds for UCITS equity and bond funds

The proposed 40% and 50% thresholds for equity and bond funds, respectively, sufficiently reconcile between the ambition of the Ecolabel and asset managers´ concerns for the consequences of a restrictive approach on portfolio diversification and the protection of end-investors’ savings. To make sure these thresholds correspond with the requirement to “identify 10-20% share of products that deliver best environmental performance of their category” (Regulation 66/2010, Art.6), we suggest testing these thresholds prior to the Ecolabel´s launch. The goal would be to test their viability against the TR technical screening criteria, verify the availability of underlying data and ascertain the size of the resulting investable universe.
EFAMA also supports a dynamic review of the thresholds once the Ecolabel´s market coverage will grow as a result of better disclosures, data availability and proliferation of green investments. Such reviews must nonetheless account for the fact that Taxonomy screening criteria will be reviewed every three years, leading to an automatic step-up of the label’s ambition.
We also recommend the inclusion of regular corporate bonds issued by companies that would meet the necessary criteria to see their equity instruments eligible under the threshold for equity funds, while green bonds from sovereign issuers should be eligible for the proportion of proceeds used to finance EU Taxonomy aligned activities.

C. Definitions for green growth and companies in transition

While we agree with the eligibility formula for “companies in transition”, we are concerned about the ability for asset managers to gain verifiable and trustworthy information on companies’ commitments (e.g. phasing out of fossil fuels) not mandated by the standardized table of the Article 8 of TR. We also do not understand why only some of the sectors eligible under the EU Taxonomy are covered.
We perceive the 50% demanded level of turnover for “green growth companies” as too high. In any given sector of the EU economy, there might be a key, best-in-class company acting as the single supplier of a certain product or technology essential for the transition. However, for a highly diversified company, this product or technology will only account for a small percentage of its total revenues.

D. Exclusions

We agree with linking the eligibility of a sovereign bond issuer to the ratification of the Paris agreement. However, we are worried by the operational difficulty in implementing the proposed list of extensive exclusion criteria. Taken together, the environmental exclusions are not aligned with those proposed under the Taxonomy “do no significant harm” technical screening criteria for climate change mitigation and adaptation. We strongly believe that exclusions should be established with a science-based approach, also when it comes to activities related to production and distribution of energy.
We believe the EU Ecolabel for environmentally sustainable financial products is not an appropriate policy instrument to address social and governance aspects. The corresponding exclusions lists not only exceeds the comprehensive minimum social safeguards provided for by the Taxonomy (Article 18 of the Level 1 Regulation), but also effectively limits the sovereign bond universe to OECD countries. Again, we recommend aligning these exclusions with the EU taxonomy. Nonetheless, if the extended list is retained, a table of excluded sovereign issuers should be compiled and maintained by EU authorities.
For tobacco-related activities, we recommend a 5% de minimis threshold for distribution activities related to tobacco products and 0% from production, to avoid the exclusion of supermarkets, hotels or restaurants that may sell tobacco in one location if it is less than 5% of its total revenue.

E. Engagement

We support the revised approach to engagement focusing on ensuring quality of the engagement process rather than on setting only quantitative criteria. Although many of our members will strive for engagement with more than the 10% of “companies in transition” in the Ecolabel fund portfolio, the proposed requirement also caters to the needs of asset managers who do not have large enough resources available. Nonetheless, we question the merits of a requirement to engage with companies having less than 20% green revenues who classify as enabling/green growth, given that many such companies may only have a small proportion of these activities as Taxonomy eligible.
We also encourage the European Commission to ensure that voting right disclosure requirements pursuant to fulfillment of engagement policy objectives are accompanied by measures to address the practical difficulties in the exercise of shareholders’ rights. Harmonizing and simplifying the rules on i.e. the filing of shareholders’ resolutions across Member States would strengthen shareholders’ impact and enable better reporting....

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