A consistent approach to taxonomies is necessary to help mobilise capital towards sustainable solutions, said ICMA’s Ricco Zhang.
Taxonomies globally need to be as aligned as possible to increase the quality and comparability of ESG-related data, according to panellists at Regulation Asia’s ‘ESG Data and Technology 2021’ event on Thursday (25 November).
“The harmonisation of all taxonomies is important and critical to enabling better data and more consistent regulation,” said Mark Uhrynuk, Partner at law firm Mayer Brown.
If different countries are asking for different environmental or social-related information from corporates, global investors will struggle to allocate their capital effectively, agreed Ricco Zhang, Senior Director for Asia-Pacific at ICMA (International Capital Markets Association), which represents financial institutions active in the international debt capital market.
“A consistent approach to taxonomies is very necessary to help produce the relevant information investors need to mobilise capital towards sustainable solutions,” Zhang said. “Regulators need to think about the usability of their taxonomies very carefully.”
Starting with the EU, an increasing number of jurisdictions have introduced green taxonomies to categorise industries and activities as environmentally sustainable against scientific criterial and thus suitable for investment via fund solutions promoting themselves as having ‘green’ objectives or characteristics.
Recognising that legal differences between jurisdictions must be accounted for, Uhrynuk added that effective taxonomies should “maintain a principles-based approach so that there is some flexibility when tailoring taxonomies in different regions and economies”.
One effort to align taxonomies is the Common Ground Taxonomy, which was launched by China and the European Commission at COP26.
Based on the comparison of the EU and China’s respective classification systems, the Common Ground Taxonomy covers 61 activities across six sectors, including electricity and gas. The taxonomy outlines where there is overlap across these activities, in order to improve interoperability between each region.
Jurisdictions implementing environmental taxonomies also cannot ignore social-related issues, warned Mayer Brown’s Uhrynuk.
“Environmental taxonomies should all contain some kind of minimum social safeguards,” he said. “It’s so important to underpin environmental efforts with social impacts.” This is to ensure a just transition, which aims to both benefit the environment and cause minimal disruption to livelihoods.
Having worked on its development, Linda Romanovska, Sustainability Finance Expert at Big Four accountancy firm PwC, said that an “internal agreement” has been reached on the European Commission-appointed Platform on Sustainable Finance’s recommendations for Europe’s social taxonomy. These will be “made public in the near future”, she said.
Gas, nuclear debate rages
Before finalising its list of socially sustainable activities, the EU first needs to finalise the environmental taxonomy.
The formal adoption of the Taxonomy Regulation’s Climate delegated act has been delayed as the European Council debates the inclusion of gas and nuclear-powered activities in the green taxonomy.
The delay has highlighted both the difficulties facing policymakers and a lack of cohesion between jurisdictions in their approaches to gas and nuclear. For example, Russia and China have adopted more ambitious frameworks, excluding all fossil fuels.
The Russian Green Taxonomy, officially launched earlier this month, has aligned with the scientific recommendations on gas published by the European Commission’s technical expert group (TEG), limiting emissions for energy production to 100 gCO2/kWh, which automatically excludes gas power plants.
China’s Green Bond Endorsed Project Catalogue has excluded most forms of natural gas production and gas-fired electricity generation. China has also removed coal-fired power activities from the catalogue this year.
In comparison, the latest draft of the South Korean taxonomy has classified unabated gas-fired generation with newer technology as a green economic activity, meaning that new gas power projects can qualify for green bond and loan financing.
The investor community is largely against the inclusion of gas and nuclear-powered activities in the EU taxonomy.
The UN-convened Net Zero Asset Owner Alliance (NZAOA) warned that it would oppose classifying gas and nuclear as green assets. Members include Allianz, Swiss Re and Caisse de dépôt et placement du Québec (CDPQ).
“The inclusion of gas-fired power would seriously compromise the EU Sustainable Taxonomy’s ability to act as an independently and scientifically designed tool for guiding investment into environmentally sustainable activities in line with the EU’s goal of reducing emissions by at least 55% by 2030,” the Principles for Responsible Investment (PRI) noted in its position paper.
The PRI has also questioned the inclusion of nuclear energy, noting that, while its potential to contribute to mitigating the impacts of climate change “is clear”, doubts remain over its ability to meet the ‘do no significant harm’ criteria for other environmental objectives.
The green taxonomy is aimed at defining which economic activities are green, not which economic sectors will enable the transition to a low-carbon economy, the PRI said.
The PSF has been tasked with developing a brown taxonomy. It will provide technical screening criteria for sectors and industries not considered wholly sustainable but have the capacity to transition to low-carbon operations and products.
The European Council is expected to make a final decision on whether to include gas and nuclear in the environmental taxonomy next month.