What is the taxonomy?

TThe EU taxonomy is a tool to help investors understand whether an economic activity is environmentally sustainable. It sets performance thresholds, or technical screening criteria, for activities which:

  • substantially contribute to environmental objectives – starting with climate change mitigation or adaptation;
  • avoid significant harm to other environmental objectives such as those focused on pollution, waste and the circular economy, water and biodiversity.

The activities must also meet minimum social safeguards, currently defined as ILO 8 Core Labour Conventions, the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

Technical screening criteria were developed by a Technical Expert Group (TEG) and released in March 2020. They will be used to develop an EU regulation (through delegaged acts) establishing the taxonomy.

Example taxonomy activity: passenger cars

  • Passenger cars with tailpipe emissions intensity of less than 50g CO2/km are considered to make a substantive contribution to climate change mitigation. This includes zero tailpipe emissions cars (hydrogen, fuel cell, electric vehicles).
  • To avoid significant harm to other environmental objectives, the production facility should manage material physical risks on a best efforts basis, avoid undermining others’ adaptation efforts, and ensure compliance with existing EU regulation on hazardous waste and end of life treatment of vehicles (circular economy) and pollution.

This is an illustrative summary. The full criteria are set out in the TEG Final Taxonomy Technical Report.

How investors and companies will use the taxonomy

Under the current proposal, investors who market environmentally-sustainable funds will disclose:

  1. how they use the taxonomy when determining if an investment is environmentally sustainable (it could be used in portfolio construction, as the basis of engagement, or investors can explain their own preferred methodology);
  2. the proportion of the fund that invests in taxonomy-eligible activities.

This will be based on Financial Metrics, such as turnover, capex and opex (where relevant) to report the percentage of their fund invested in Taxonomy-aligned activities.

The taxonomy can help investors to comply with the recently-agreed EU disclosure requirements on sustainable investments, which include requirements for funds targeting sustainability objectives to disclose the methodologies used to assess, measure and monitor the objectives, how those objectives are met and the overall sustainability impact of the product. Further rules on how to present these disclosures are being developed.

Companies are also encouraged to disclose their taxonomy-related revenues and expenditures under the updated Non-Financial Reporting Directive guidelines.

The PRI’s position

The PRI supports the EU’s efforts to establish a taxonomy in regulation. The taxonomy is an important step forward to ensure that capital markets can contribute to the transition to a low-carbon, resilient and resource-efficient economy.

The PRI has been acting as Rapporteur for the Taxonomy working group, within the The Technical Expert Group on Sustainable Finance – an independent advisory body made up of members from finance, industry, the public sector and civil society established in June 2018 to help develop the technical details of the taxonomy.

The taxonomy offers myriad benefits to investors. It can help to:

  • identify investment opportunities which meet a high standard of sustainability;
  • construct taxonomy-aligned portfolios and monitor their impact;
  • strengthen and enable more focused dialogue between investors and companies on investment impact;
  • support communication between fund managers and asset owners, particularly resource-constrained asset owners that may struggle to develop deep environmental expertise.

What should investors do?

The PRI recommends that investors:

  • read the updated user guidance in the final TEG reports;
  • read the PRI briefing for investors on the taxonomy;
  • investigate how the taxonomy could apply to existing green funds or new strategies (the PRI is coordinating a Taxonomy Practitioners Group to explore the implications for signatories and develop case studies which will be released in September 2020).

The full methodology, detailed user guidance and the technical screening criteria are listed in the Technical Annex.

 

Taxonomy Practitioners Group

Starting in late 2019, the PRI coordinated over 40 investment managers and asset owners who worked to implement the taxonomy on a voluntary basis in anticipation of upcoming European regulation. Read our report, which shares insights from this first comprehensive set of case studies around how to use the EU taxonomy.

Contact

For further details on the taxonomy or the PRI’s EU engagement, please contact:

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The PRI engages in public policy to remove barriers to a more sustainable financial system, consistent with the PRI’s mission and strategy.