EFAMA supports extending EU Taxonomy but warns against black-list approach

Written by Adam Cadle

07/09/2021

The European Fund and Asset Management Association (EFAMA) is in support of extending the EU Taxonomy ‘beyond green’ but has stressed that a black-list based approach must be avoided.

The comments are in response to a public consultation by the Platform on Sustainable Finance on taxonomy extension, which proposes extending the current EU Taxonomy to include significantly harmful activities and no significant impact activities both in relation to environmental sustainability.

After gathering feedback the Platform on Sustainable Finance will publish a final report later this year that will help inform the commission’s decisions as they respond to the requirement of Article 26.2(a) of the Taxonomy Regulation, EU Regulation 2020/852.

Commenting, EFAMA director-general Tanguy van de Werve said: "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".

Despite its support, however, EFAMA has set out several conditions for extending the Taxonomy. For example, a black-list approach should be avoided. EFAMA believes that if investors are asked to stop investing in some companies it will disincentivise their existing transition efforts and ignore the benefits of engagement. Moreover, the association said 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.

It also thinks the taxonomy should support companies in their transition away from significant harmful activities. Asset managers will be able to design better, bigger and safer decarbonisation financial products if they are able to distinguish significantly harmful activities from those that are not, EFAMA said.

“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,” it stated.

In extending the Taxonomy, it suggests developing Paris-aligned reference trajectories for every relevant sector to make firms' emission reduction strategies credible, comparable and science-based. EFAMA also thinks a Transition Asset Ratio should be set up alongside the existing Green Asset Ratio to reward companies entering the transition and incentivise their access to financing without misrepresenting transitioning activities as green.

Finally, the Taxonomy should 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.

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