By Nathan Fabian (@nathanafabian), Chief Responsible Investment Officer, PRI, Chair, European Platform on Sustainable Finance
In a first-of-its-kind, today the European Commission has launched its new Platform on Sustainable Finance. The Platform responds to the urgency of the sustainability transition by establishing a permanent public and private sector expert panel to develop sustainable finance policies and tools. The Platform’s mandate includes further development of the technical screening criteria for the EU’s Sustainable Taxonomy, as well as a review of potential social and significant harm criteria. The Platform has two further objectives – to monitor capital flows to sustainable finance and to undertake policy development on sustainable finance. For the first time, we will know how much of our capital is sustainable – and how much is not.
The Platform’s 50+ experts include representatives from investment, banking, scientific, industry, environmental groups and civil society. Importantly, the group includes members with direct expertise from many of the economic sectors that must contribute to a sustainable economy. The private sector members are joined by representatives of the European Environment Agency, the European Supervisory Authorities (EBA, EIOPA, ESMA), the European Investment Bank, the European Investment Fund and the European Union Agency for Fundamental Rights.
Reflecting the global importance of Europe’s efforts, the Platform will include observers from the Network of Central Banks and Supervisors for Greening the Financial System, the Organisation for Economic Co-operation and Development, the European Financial Reporting Advisory Group, the United Nations Environment Programme Finance Initiative, the European Bank for Reconstruction and Development and the European Stability Mechanism.
The initial two-year mandate of the group includes:
(i) development of technical screening criteria for the EU Taxonomy,
(ii) review of the Taxonomy to potentially include social and significant harm criteria;
(iii) observation of capital flows towards sustainable finance, and
(iv) policy development on sustainable finance.
Critical issues loom for the Platform on how Taxonomy criteria can inform transitional finance for economies, companies, and financial portfolios to align with – and contribute to – sustainability goals. Of equal importance is monitoring the development of reporting on Taxonomy alignment, to ensure that investors with disclosure obligations under the Taxonomy Regulation and companies with obligations under the Non-Financial Reporting Directive can fulfil them in a meaningful way.
Unless we base our understanding of “how good is good enough” on the actual contribution to sustainability goals, rather than solely on good intentions or incremental plans, economic transition will stall and financial markets will struggle to play their full potential role in realising sustainability goals.
The Platform’s launch is one way to deliver on European Green Deal. The Green Deal brings sustainability objectives to the core of Europe’s shared strategy for prosperity. The centrepiece is a goal to reduce greenhouse gas emissions by at least 55% below 1990 levels, in 2030. This deep reduction target establishes a pathway to net zero emissions by 2050 that is consistent with ambitions to limit warming to around 1.5 degrees – the aim of the Paris Agreement.
To achieve the 2030 target in Europe, EUR 350 billion per year of energy-related investment alone will be required. This is before finance for Europe’s other environmental priorities is added, which will include investments in climate adaptation, pollution prevention and control, water system health, bio-diverse eco-systems, and a circular economy.
Financial markets work best when they are free to assess risk and pursue returns. But investment in economic activity which pollutes, wastes and is unresponsive to environmental constraints is shifting costs and building financial risk. Investors and lenders have known this for some time. Now that environmental and social goals are becoming explicit, urgent, and supported in law, financial activity that is careless about sustainability performance becomes one of society’s problems, not part of the solution to greater or shared prosperity.[i]
Recognising the importance of climate goals, 45 institutional investors and over 1000 companies have made their own commitments to net zero emissions by 2050 and reported them as part of the UNFCCC race to zero campaign. Contributing to this is the PRI and UNEPFI convened Net Zero Asset Owner Alliance, which includes 29 investors managing nearly $5 trillion, who have made commitments to align their portfolios with a pathway to net zero by 2050. These investors will transition their portfolios to a sustainable footing and the Taxonomy will inform their decisions.
Without a comprehensive and widely used sustainable taxonomy, fragmentation and differences of view on the environmental performance of our economies threatens to undermine trust and efficiency in financial markets at a time when both matter greatly. Unless we base our understanding of “how good is good enough” on the actual contribution to sustainability goals, rather than solely on good intentions or incremental steps, financial markets will struggle to play their full potential role in realising sustainability goals.
The Platform on Sustainable Finance will support financial markets to steward and allocate their capital to activities that contribute substantially to Europe’s sustainability goals. The Taxonomy is the foundation on which these decisions can be based, ensuring that for the first time, we will know how much of our capital is sustainable and how much is not.
The PRI has worked with its responsible investor signatories to ensure that market insights influence the design of Europe’s future financial system. The PRI has been a conduit and facilitator of both technical input and investor experiences into the deliberations of policy makers and on the design of the EU Taxonomy. The PRI is delighted to continue contributing to Europe’s sustainable finance activities by supporting the appointment of Nathan Fabian in the role of Chair of the Platform on Sustainable Finance.
We warmly congratulate Nathan Fabian on his appointment as Chair of the European Commission’s Platform on Sustainable Finance, and are very pleased that he will also continue in his current role as Chief Responsible Investment Officer at PRI. The well-deserved appointment reflects Nathan’s tremendous depth of knowledge and experience in sustainable finance – including his time as Rapporteur for the Taxonomy Group of the EU Technical Expert Group on Sustainable Finance – will be a tremendous asset in the role. More broadly, the Platform is an important step forward for the EU, and sets a leading example for markets globally, in advancing responsible investment.
Fiona Reynolds, CEO, PRI
Statement by Nathan Fabian, Chair of the Platform on Sustainable Finance, former rapporteur of the Technical Expert Group on Sustainable Finance
20 November 2020
The Delegated Act from the European Commission is an important step forward for the EU Taxonomy. The Taxonomy is a clear reference point for sustainability performance, and a critical tool to align financial flows to a sustainable European economy.
As former Rapporteur on Taxonomy for the Technical Expert Group on Sustainable Finance (TEG), I am pleased to see the Commission adopting so many aspects of the TEG’s advice in the Delegated Act.
The Delegated Act includes changes to the TEG’s recommendations. These appear to result from a combination of adjustments to improve measurability, resolve presentational issues in criteria, align criteria more closely with EU legislation and the addition of criteria for some economic activities. Assessing how substantial the changes are from an environmental performance perspective will require careful review and I am confident that stakeholders will use the four-week consultation period to comment on these changes.
As the former TEG rapporteur, I remain strongly committed to the work that the TEG did. The experts on the TEG made recommendations in line with the requirements of the Regulation and the best evidence available.
Importantly, the TEG’s recommendations were aligned to key EU goals: the need to achieve climate neutrality by 2050, to reduce emissions by at least 55% by 2030, to build climate resilience across our economy, to protect our air, water and ecosystems and accelerate the transition to a circular economy.
The TEG recommendations send a very clear signal to companies and investors about the environmental performance that is needed to be aligned to our environmental goals and not the practices or policies of the past.
The answers may not always be comfortable – for companies, investors and even Member States – but the urgency of the transition cannot be denied. We need robust, science-based thresholds to ensure that markets function properly and to build confidence in the taxonomy as a credible transition tool.
European citizens need to know that their investments are truly aligned with a sustainable economy and future.
As the consultation on the Taxonomy Delegated Act commences, I urge the Commission and co-legislators to ensure that the Taxonomy criteria remain aligned to the EU’s sustainability goals, in line with the best available evidence.
On the role of the Platform on Sustainable Finance
The Platform on Sustainable Finance has an important role to develop the EU Taxonomy further for environmental objectives, and to consider new dimensions – such as possible social objectives and criteria. The Platform will advise the Commission on the usability and practicality of the delegated act. However, the Platform’s role is not to re-run the detailed technical work of the Technical Expert Group on Sustainable Finance (TEG).
On climate transition and the Taxonomy
Much of the debate around the Taxonomy is whether, and how, the Taxonomy criteria recognise not just low or zero carbon activities, but the activities we need in an economic transition to meet climate goals. This was central to the TEG’s recommendations. The criteria are aligned to the EU’s climate goals and the rapid transition these require, which include a front-loading of emissions reductions before 2030, and continued reductions after that. They recognise that incremental change is not enough; we need a step change in performance to be aligned to our goals. And they are based on the best available technologies and practices today, but with plans to tighten over time. TEG also recommended that any financing to help companies bring activities in line with these criteria must count as “environmentally sustainable”.
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[i] This notion of sustainability performance is the basis of the second pillar in the double materiality approach in Europe’s Non-Financial Reporting Directive (the first being on the financial materiality to an entity of sustainability issues).