Input to the EU classification system for Green Investments (Taxonomy Regulation)

Executive Summary

• SGI Europe welcomes the Commission’s determination to continue the process with the EU Taxonomy, aiming to finance the transition to a climate-neutral Europe by 2050. SGI Europe is very supportive in setting the right framework to redirect capital flows towards sustainable economic activities. The initiative for a sustainable finance mechanism and the Taxonomy Regulation can act as an enabling tool to realise the objectives of the EU Green Deal.
• For this to be effective, SGI Europe sees it as essential that this framework is guided by common principles that safeguard similar level of ambition across various sectors and aims for a technology neutral approach and respects the role of public undertakings, which we fear is not reflected in its current form. It will be also important to ensure that the EU Taxonomy takes into account the maturity of the technologies and its contribution that it will make in reducing CO2 emissions.
• Furthermore, SGI Europe deems it as highly necessary that the EU Taxonomy is fully taking into account the respected national and EU Legislations and apply them accordingly. The key element should be to simplify the process to make sustainable and resilient projects more attractive. Indeed, a high number of the technical criteria refer to EU directives (around 20 Directives as regards the Real Estate activities sector). We believe guidance (a correspondence table) as regards their transposition into national law would much facilitate their appropriation by all actors in the EU and ensure their harmonious application.
• Additionally, in regard to the ‘Do No Significant Harm’ (DNSH) assessment, the principle of proportionality (in terms of company size, investment size, risk profile etc.) should prevail, in accordance with risk management practices. SGI Europe finds it difficult to see how the proportionality principle may be applied in practice and ask to reassess this criterion as well as provide concrete guidance on the implementation of the principle. In this regard, The European Securities and Markets Authority’s (ESMA) recommendation that the Commission develops a methodology to allow a sector-coefficient to be assigned for smaller entities is an avenue that should be explored. Furthermore, the EU Commission should provide more clarity and support for the application of the taxonomy, e.g. by more explicitly naming the expectations in the due diligence on DNSH criteria and on minimum social standards.
• Overall, SGI Europe fears that service providers and investors may lose the needed interest if the information burden is too onerous and opt for traditional funding requiring less disclosure. Ultimately, the sustainable finance market rests on the availability of eligible assets. Therefore, the way the EU Taxonomy is designed it is risks undermining investments in sustainable and resilient projects and additionally slowing down its harmonisation with other sustainable investment strategies i.e the EU Green Bond Standards.
• From SGI Europe’s point of view, due to its high complexity and its timeline of implementation, a gradual implementation of the Taxonomy would bring about a considerable increase in market successful implementation and acceptance and thus reorient private funds more quickly into sustainable economic activities. For instance, it should be made clear that the disclosure requirements deriving from Article 8 of the Taxonomy Regulation will only become mandatory for financial years beginning after 1 January 2022.