Inputs from COP 28: Implementation practices and key findings from relevant market participants
January always marks the start of a new reporting cycle. However, a review of the past year and the key findings of EU taxonomy users can be very revealing. As part of COP 28 - the annual UN Climate Change Conference - leading experts and stakeholders working with the taxonomy came together to discuss the innovations and practical application of the framework. The most important points are summarized in this article.
Frameworks for sustainable finance have been around for some time, aiming to enable a green transition by redirecting private capital flows towards sustainable investments. In the EU, three instruments are intended to facilitate this transition: a comprehensive disclosure regime, instruments such as the EU Green Bond Standard or various climate benchmarks, and an instrument that increases market transparency while reducing the risk of greenwashing. The latter instrument can be found in the EU taxonomy. The EU taxonomy is often referred to as a scientifically based classification system for sustainable activities that aims to create a common understanding in the market.
2023 was the first year in which non-financial companies had to report their taxonomy adjustment figures. While critics have predicted sobering statistics, the numbers tell a different story. According to Bloomberg (represented by Nadia Humphreys, Head of Climate Finance and Regulatory Solutions), out of 2300 obligated companies, 1700 have reported the suitability metrics and 1400 have disclosed alignment figures. These figures include companies that have disclosed zero percent, meaning that they have acknowledged the framework but are not yet able to assess their suitability or alignment metrics. Nonetheless, 48% of companies that have reported CapEx suitability have identified some level of alignment with the taxonomy. Of the institutions reporting eligibility for revenue, 38% have published a non-zero level of alignment. Surprisingly, the reported alignment rates are more promising than originally expected. For the Stock 600 companies, the average revenue alignment ratio is 16%. The averages for CapEx and OpEx are slightly higher, with an average ratio between 20% and 25%. Certain sectors are shown as leaders, with the energy/utilities sector taking the lead, followed by real estate and materials.
Interest in the taxonomy framework extends beyond the sectors and borders of the EU. In 12 different non-EU countries, around 100 companies have disclosed voluntary taxonomy figures due to increasing pressure from shareholders. In addition, around 40 classification systems have been developed at local level, using the EU taxonomy as a model.
Although the figures are promising, the challenge is to collect reliable and high-quality data. According to Julia Backmann (EU Head of Business Legal, Managing Director Allianz), the lack of high quality data is currently one of the biggest obstacles in aligning investment strategies with the metrics of the taxonomy. However, it is expected that access to comparable data will become easier in the coming years due to the increasing scope of the CSRD. Until then, financial institutions can and should play a supporting role in bridging data gaps, e.g. by incorporating taxonomy questionnaires into their due diligence processes.
Improving the accuracy of the reported data is a second key issue for the coming reporting year. Obviously, companies are facing various problems in disclosing the correct percentages and using the annexes provided. This is not surprising as the framework introduces a very new style of reporting. Experts recommend following the user guides and supporting materials provided (e.g. the Taxonomy Compass) to avoid errors and data inconsistencies. The goal is clear and comparable data that can be used as reliable benchmarks - "then the data will flow and work properly".
The EU institutions must also face up to their responsibilities. Even if reporting is mandatory, the inclusion of the taxonomy as a guiding mechanism is voluntary. Julia Backmann warns that an inappropriately high level of complexity in the regulation and high obligations in relation to portfolio restrictions could have a negative, deterrent effect.
Simplifying implementation and improving user-friendliness is therefore key to success.
“The framework is not written in stone yet and will inevitably evolve.”
Nicole Della Vedova (Head of Corporate and Structured Finance Enel)
Clear key concepts and easily accessible tools need to be made available to users, sustainable finance frameworks need to be consolidated at EU level and stakeholder feedback needs to be incorporated. The EU taxonomy needs to be designed as an easy-to-use tool that ensures international comparability, is effective at a global level and minimizes any additional costs. Although the EU taxonomy clearly has the potential to guide investor decisions and promote a greener economy, its effectiveness should still be carefully assessed to reap the expected benefits.
Therefore, it is important to understand how the taxonomy system can be used. For businesses, the most valuable areas of application are as follows:
Certain guiding tools are proposed, e.g. roadmaps for adaptation, SBTis, net zero trajectories, taxonomy-aligned performance metrics. The importance of active engagement is also emphasized. Institutions are advised to develop close links with their supply chain, participate in the review of existing criteria for eligible activities and regularly review internal processes in light of the evolving taxonomy guidelines.
As has been shown, experts and practitioners point to the relevance of the EU taxonomy. The reported figures are encouraging. But this is just the beginning and there are still some important challenges that need to be addressed. One of these is the lack of comparable data due to limited access to reliable information in some areas and uncertainty among users when it comes to valuation and calculation. The second major challenge is to ensure simplified compliance. While practitioners should rely on guidance documents and actively participate in the development of the framework, the EU needs to ensure that feedback is implemented from the bottom up. In addition, there must be a common will in the market to not only comply with the framework, but to strategically incorporate it. Only then can the taxonomy fulfill its intended purpose.
Panelists: Elodie Feller (UNEP FI) - Host Albane Demblans (Deputy Head of Unit, DG FISMA B2. Sustainable finance Nicole Della Vedova (Head of Corporate and Structured Finance Enel)
Julia Backmann (EU Head of Business Legal - Managing Director Allianz) Nadia Humphreys (Head of Climate Finance and Regulatory Solutions, Bloomberg)
Source: https://www.youtube.com/live/1DUUHUrBw-c?si=KxoZoMMKJ4Vnp5go
