07 September 2021

EFAMA: Brown taxonomy: An opportunity to transition away from significantly harmful activities

"The proposal to extend the taxonomy and include significantly harmful activities in urgent need of transition, would allow asset managers to bring to market financial products that help the "hard-to-decarbonise" sectors confront climate change and accelerate their necessary transformation".

EFAMA responded to a public consultation of the Platform on Sustainable Finance on taxonomy extension options linked to environmental objectives.

 

Tanguy van de Werve, EFAMA Director General, commented: "An effective sustainable finance ecosystem should aim at rewarding companies with the best environmental performance, AS WELL AS attracting funding for companies with credible and ambitious transition plans. The proposal to extend the taxonomy and include significantly harmful activities in urgent need of transition, would allow asset managers to bring to market financial products that help the "hard-to-decarbonise" sectors confront climate change and accelerate their necessary transformation".

 

In extending the Taxonomy, EFAMA recommends the following:   

 

1. Support companies in their transitioning away from significant harmful activities. By distinguishing significantly harmful activities that have the potential to transform and no longer cause harm, asset managers will be able to design better, bigger and safer decarbonisation financial products. The enlarged taxonomy-aligned investible universe would decrease risks associated with the current environmental taxonomy, such as overweighting of highly green assets or the emergence of green asset bubbles. Investee companies would benefit from more clarity about which environmental performance levels are no longer acceptable, thereby improving the credibility of their decarbonisation plans.

 

2. Avoid a blacklist-based approach to the extended taxonomy. If investors are asked to stop investing in some companies this will disincentivise their existing transition efforts and ignore the benefits of engagement. Moreover, a blacklist may not only lead to decommissioning of significantly harmful activities and companies, but also drive their selling to non-European or less climate-conscious investors, potentially below value, without any positive impact on climate.

 

3. Develop Paris-aligned reference trajectories for every relevant sector to make firms' emission reduction strategies credible, comparable and science-based. The taxonomy extension should also act as a vehicle for introducing quality standards and verification procedures to such forward-looking transition plans.

 

4. Set up a Transition Asset Ratio alongside the existing Green Asset Ratio to reward companies entering the transition and incentivise their access to financing without misrepresenting transitioning activities as green.

 

5. Avoid focusing on a legally binding ‘no significant impact’ (NSI) taxonomy at this stage, given the marginal significance of such companies for the transition at a macro level. NSI activities could be covered in non-binding guidance, giving investors clarity on which activities are considered ‘not critical’ in terms of environmental impact.

EFAMA

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