By Fiona Reynolds (@Fireynolds), CEO, PRI
COP26 has been badged the ‘net zero’ COP. For this COP, all countries must review their Nationally Determined Contributions (NDCs) and submit mid-century decarbonisation plans in line with their commitments under the Paris Agreement.
There will be intensive scrutiny of these commitments and it’s good to see that there are signs of global action in some of the world’s major economies, with the EU proposing a new climate law mandating a commitment to net zero by 2050, the US Democratic presidential candidates debating their response to climate change, US states and cities taking action, Germany banning coal by 2038, Japan reviewing its support for coal and the UK already moving up its date for phasing-out vehicles with internal combustion engines.
For the PRI’s part, we’ve introduced mandatory TCFD reporting and with UNEPFI have launched the UN Net Zero Asset Owner Alliance.
With emissions on the rise however, there is still so much to do if we have any hope of keeping the world to 1.5 degrees of warming.
PRI signatories commonly ask how they should measure their climate commitments. The EU taxonomy is likely to be a key part of the answer for many.
That’s because the taxonomy is a classification tool, essentially a list of economic activities and performance thresholds. It specifies what level of environmental performance a service or product should have if it is going to contribute to Europe’s environmental objectives. The first phase looks at activities that can substantially contribute to climate change mitigation or adaptation.
Crucially, an activity will only be consistent with the taxonomy if it does no significant harm to the other environmental objectives, and meets minimum safeguards, defined in line with the OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
The taxonomy matters – most importantly because it is a serious effort by financial regulators to mandate disclosure against a sustainability target, rather than a financial one. In this case, the climate change mitigation target is Europe’s commitment to net zero carbon emissions by 2050.
The taxonomy matters – most importantly because it is a serious effort by financial regulators to mandate disclosure against a sustainability target, rather than a financial one
The distinction is subtle but significant.
To date, most financial regulators have focused their efforts on financial risk. The taxonomy, by contrast, will translate EU-wide sustainability goals into a tool investors and companies can work with. Taxonomy disclosures will help companies and issuers access green financing to decarbonise high-emitting sectors and grow low-carbon sectors.
On climate change mitigation, the taxonomy includes activities already consistent with net-zero carbon emissions by 2050, and importantly, transition and enabling activities too, where they are on a clear pathway to reaching the net-zero target. Examples of transition activities include cement manufacturing and freight transport – activities that are not typically considered environmentally friendly, but for which good practice exists, and which are – and will be – an important part of Europe’s economy.
The taxonomy also matters because it’s underpinned by regulation. The list of economic activities and performance thresholds will be issued as part of the explicit legal requirements from the European Commission by the end of 2020.
Financial market participants and companies will be required to complete their first set of taxonomy disclosures, covering activities that substantially contribute to climate change mitigation and adaptation by 31 December 2021. The expanded set of disclosures covering activities that substantially contribute to six environmental objectives will be required by the end of 2022.
Investors with funds in Europe will be required to disclose against the taxonomy where the fund is marketed as contributing to an environmental objective.
As we start a decade of delivery, the taxonomy is likely to be one of its key developments. We encourage you to familiarise yourself with the TEG’s user guidance and review the relevant resources on the PRI’s website. PRI staff have been deeply involved in the EU taxonomy and are here to help. If you have questions, get in touch.
To help investors understand how to implement the taxonomy, the PRI has established a practitioners’ group, representing a wide membership, including US and Japanese investors. The group will develop case studies on taxonomy implementation over the coming months and share their best practice with the wider PRI signatory base to be published later this year.
This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.
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