Classifying what is « green » to better guide investors (Study)

This article is one of the chapters of the report submitted by BSI Economics to the Evaluation and Control Mission of the Finance Committee of the National Assembly as part of its mission on private investment in the ecological transition, on the basis of which members of BSI Economics were heard on June 28, 2018.

Full report:

Findings

• The targeting of green investment remains a complex issue for investors, who also lack incentives. The absence of a common definition of the « green » or « sustainable » nature of a given asset or activity has thus been highlighted as one of the major obstacles to the development of investment in the ecological transition.
• In this context, several public and private initiatives have sought to define and classify « green » assets. The differences between these definitions and taxonomies illustrate both the complexity (political and scientific) of the exercise and its necessity in order to direct capital towards the ecological and energy transition. In its Action Plan for Sustainable Finance published in March 2018, the European Commission identified the development of a common taxonomy at the European level as the cornerstone and prerequisite for the development of the measures it proposes for green finance.
• Defining and classifying what is « green, » at least at the European level, would attract investors to finance the ecological transition through several channels: by facilitating the identification of green assets, reducing transaction costs, enabling the emergence of cross-border investments within the European Union (and thus avoiding market fragmentation), encouraging the disclosure of information on companies’ sustainable economic activities, and encouraging other EU policies to create « green » labels.

Proposals

• The taxonomy of green assets must meet a series of key characteristics to ensure its long-term success, including: a broad scope (including activities that are not directly green); a high degree of granularity; a degree of flexibility to respond to future technological, scientific, and regulatory changes; integration of the entire value chain of an activity; and consideration of governance and subcontracting elements.
• The taxonomy must follow a 2°C trajectory, given that each activity is seeing its carbon intensity gradually decrease, at a level and pace that depends on its specific characteristics and the technological disruptions experienced by the sector.
• The classification of green assets must be accompanied by the formulation of environmental policy objectives and corresponding eligibility indicators and thresholds. In this respect, the taxonomy would benefit from being developed in close conjunction with all internal EU policies and Member State governments. The associated criteria and their weighting must also be in line with the EU’s environmental agenda and its evolution over time (hence the need for flexibility mentioned above).
• Classifying sustainable assets and activities also requires strengthening the measurement of the environmental impact of financial mechanisms (i.e., green bonds, green loans, and green investments) and non-financial mechanisms (shareholder activism, information disclosure, and dialogue with investors) that shape green investment.
• The taxonomy of green assets must be accompanied by the development, in a second phase, of guidelines and best practice guides for market participants with a view to achieving the most comprehensive adoption possible.
• Finally, the taxonomy of green assets developed by the European Union must aim to ensure its comparability with other similar projects at the international level. In the absence of the adoption of a universal taxonomy (the achievement of which has so far been hampered by a lack of enhanced international coordination on the subject, particularly with regard to the US position), the taxonomy developed within the European Union should be able to be used in parallel with other existing taxonomies, in particular through the development of common primary indicators, in conjunction with the relevant international organizations.

On December 7, 2018, the European Commission’s technical expert group, set up in July 2018, published a public consultation on the draft taxonomy of activities that contribute substantially to climate change mitigation, in accordance with Article 6 of the May 2018 draft regulation. This consultation is open until February 22, 2019.

The main features of this draft taxonomy are as follows:

• It aims to cover all economic sectors, following the European NACE classification system, the statistical classification of economic activities in the European Community, which may be supplemented by other statistical frameworks (Classification of Environmental Protection Activities; Classification of Resource Management Activities, etc.);
• The methodology for selecting economic activities is based on two complementary factors: (i) macroeconomic sectors with high carbon intensity; and (ii) the potential for substantial GHG emission reductions in other sectors through the economic activities concerned (assuming that the life cycle of GHG emissions from the activity does not conflict with the objective of climate change mitigation).
• On this basis, the technical expert group selected eight macroeconomic sectors for climate change mitigation with regard to GHG emissions: agriculture, forestry, and fisheries; mining and quarrying; manufacturing; energy production (electricity, gas, steam, etc.); water supply, water management, wastewater treatment, and sanitation activities; construction; transportation and storage; and real estate.
• The technical expert group identified the information and communication technology sector and the scientific and technical activities sector as sectors that can contribute to climate change mitigation.