The EU Green Taxonomy: The Good, the Bad and the Future

August 2019


A lot has been written about the draft taxonomy since the European Commission’s Technical Expert Group (TEG) first published their report in June 2019, setting out their proposals on activities that should contribute to climate change mitigation and adaptation in relation to the development of an EU classification system for environmentally sustainable economic activities.

At Sustineri, we have undertaken an analysis of the range of commentaries that have emerged in relation to the Taxonomy Technical Report published by the TEG from a variety of stakeholders such as financial institutions and think-tanks. In this piece, we summarise what might be considered “good” about the proposals, where improvement may be needed, and what the future prospects may be. Anyone with an interest – investors, companies, international policymakers – in how this landmark policy initiative is developing should hopefully find this useful.

What is proposed?

The report on the EU Taxonomy provides a classification system to determine whether an economic activity is environmentally sustainable. Inclusion in the taxonomy is restricted to activities that contribute to at least one of the six environmental objectives – “Climate Change Mitigation, Climate Change Adaptation, Sustainable Use and Protection of Water and Marine Resources, Transition to a Circular Economy Waste Prevention and Recycling, Pollution Prevention and Control, and Protection of Healthy Ecosystems – and also on the basis that it does no significant harm to any of the other environmental objectives”.

In its current draft, the Taxonomy includes specifications for only two of the six environmental objectives. For Climate Change Mitigation, the report presents a list of eligible economic activities. Included are “activities that are already low carbon, activities that contribute to a transition to a net-zero emissions economy in 2050 but are not currently close to a net-zero carbon emissions level, and activities that enable low carbon performance or enable substantial emissions reductions”.

For Climate Change Adaptation, the draft recognises that adaptation is context – and location-specific. Hence, instead a list of activities, it provides a set of guiding principles and screening criteria to assess the potential contribution of an economic activity to adapt to climate change and increase climate resilience. An adaptation activity may be eligible if “all material physical climate risks identified for the economic activity are reduced to the extent possible and on a best effort basis; and/or it reduces material physical climate risk in other economic activities”.

The other four environmental objectives will be reviewed by the Platform on Sustainable Finance, which will permanently replace the TEG, starting from autumn 2019, and will also have the role of regularly updating the sustainability criteria.

The Taxonomy, according to the TEG, should be implemented in a five-step process:

  1. Identify the activities conducted by the investee that could be eligible.
  2. For each potentially eligible activity, verify whether the company or issuer meets the relevant screening criteria.
  3. Verify that the do no significant harm criteria are being met by the issuer.
  4. Ensure compliance of the investee with the social minimum safeguards specified in the Taxonomy.
  5. Calculate alignment of investments with the Taxonomy and prepare disclosures at the investment product level.

What are the benefits?

A substantial recognised benefit of the introduction of a taxonomy is that it would significantly reduce (perhaps even remove altogether) the risk of “green-washing”of financial products. At present, it is too convenient for financial institutions to launch a product on to the market which claims to support low-carbon investment when the reality is more dubious, e.g. the issuance of green bonds with question marks about the use of the proceeds.

Several of the commentaries on the TEG study have noted the importance of the green-washing issue, as they – including the UNEP FI– have identified the benefit that the taxonomy should bring in developing a common language around climate finance. The establishment of a common understanding and a definition about what should be classified as “green” is a primary objective of the taxonomy: this is presumably why TEG members have decided to go into such granular detail, to provide clarity and to avoid confusion.

Strengthened disclosure on climate risk by investors has been a European Commission target since they launched their sustainable finance initiative. Indeed, the draft InvestEU programme (which is essentially the investment plan for the EU financing institutions for the next decade) specifically requires sustainability-related financial products to disclose detailed information about how they will meet their sustainability objectives. Published commentaries are positive in their verdict that the advent of the taxonomy will enhance the quality of climate disclosure across the sector.

National policymakers and regulators, according to a couple of commentators, should also welcome the taxonomy because of what it will do to inform their own national policies and measures. These past two years have seen steady progress, certainly in Western Europe, by e.g. the British and Dutch central regulators (prime movers behind the Network for Greening the Financial System), to mainstream climate and sustainability for finance and investment. Once the EU taxonomy is in place, it should bolster, and perhaps embolden, the progressive national regulators and force climate on to the agenda of other regulators who still don’t believe they should pay attention to it.

Last on the benefits, we will note our view that the “do no significant harm” clause in respect of the broader environment has attracted less attention than the classification system of the taxonomy. However, its inclusion, with its emphasis on the need to safeguard key environmental areas, might be beneficial to the impact investing sector because of its straightforward read-across.

How might it be improved, now or in the future?

A number of the commentaries we analysed (including from the trade association EFAMA) were concerned that the taxonomy might simply impose – in the light of the complex and granular detail that it goes into – too much of a burden to make it usable for an investor. It wouldn’t be the first time that financial institutions have complained about “restrictive regulatory burdens”.  But it’s certainly an issue the Commission will need to address in drawing up the legislation.

Linked to this, one or two commentators also complained that the taxonomy will not be made mandatory, and its impact will therefore be undermined by its non-binding nature. We heard the same about the TCFD when it was first introduced: making it mandatory would undoubtedly have accelerated its progress in some Western European jurisdictions. EU policymakers may wish to learn relevant lessons from the TCFD experience. There is also a related concern that, if the taxonomy is not mandatory, it risks being applied only by “greener” investors

The lack of available data at asset and activity level might also, it’s felt, hold back the take-up of the taxonomy, in that investors might not have the information to be able to undertake all five of the steps required under the taxonomy process. The reverse corollary of this, of course, is that the taxonomy might be a driver to make much more data available at the granular level.

The other consistent criticism aimed at the taxonomy (which academics and think-tanks have been particularly vocal about) has been circulating in European circles since the HLEG was established: that investors need a “brown” (i.e. carbon/fossil fuel-based) taxonomyas well as green, if they are able to make the most effective investment decisions that balance both opportunity and risk. The argument goes that, without sufficient knowledge of the brown exposure of an investment, there is a risk that an investor doesn’t have the full and necessary picture.

What does this mean specifically for investors?

The intended users of the EU Taxonomy are “Member States or the EU when adopting measures on market actors in respect to financial products or corporate bonds that are marketed as environmentally sustainable; and Financial market participants offering financial products as environmentally sustainable investments”. Furthermore, the EU believes that the Taxonomy could be used as the basis for labels, standards and definitions.

Apart from its significance for policymakers (which we address below in our conclusions), the taxonomy is therefore of particular importance, in our view, to institutional investors, banks and insurance companies. How financial institutions respond, will to a large extent depend on whether they see “first mover” competitive advantage to get ahead on green and sustainable investments.

Institutions will, of course, note that the TEG proposals are only a draft, but they should be under no illusion about the direction of travel and would be wise to work on the assumption that a taxonomy will pass into EU legislation by the middle of 2020.

Some of the major investment organisations have refrained from substantive comment on the TEG report, perhaps because the taxonomy is, at this stage, still some way from draft legislation status. However, in the light of the pros and cons listed above, it might still be helpful to underline what we have seen to be the principal investor concerns aired to date:

  • the resources issue (highlighted above): some investors seem to be concerned that the detail required to apply the taxonomy to investments might be overly resource-intensive;
  • lack of transparency and quality of data (see above) also seems to be a particular issue;
  • one other factor considered is whether the taxonomy will promote more active investor engagement with companies which can enhance knowledge and insights into asset and activity-level data, thus, making investors better able to go through all five steps of the taxonomy convincingly.

Taking these concerns in the round does pose an overall question for investors: how much resource should they allocate to gain first mover advantage? Or would they be better advised to free-ride others and change gear in their approach as taxonomy-related practices and information becomes more widely used and available.

What next in Europe and internationally?

 Most immediately for the EU, the TEG has asked for feedback on its report by 13 September. It will then analyse the responses and advise the Commission on next steps, with a view to the latter legislating. The Commission has promised to undertake a public consultationon its legislative proposal for the taxonomy before it becomes law. The expectation – although the EU law-making process will be subject to the inevitable hiatus as a new Commission, under new President Ursula von der Leyen, takes its place in autumn – is that it will pass into law, along with other parts of the Commission’s sustainable finance action plan, by the middle of next year.

The bigger issues surrounding the future prospects of the taxonomy are, in our view, threefold:

  • whether the green wave of new MEPs, who as an early marker forced von der Leyen into more ambitious pledges on decarbonisation as a price for their support for her confirmation, will in tandem with the Commission in turn lobby for a more ambitious taxonomythat has a wider impact on member state legislation.


  • looking beyond Europe, the Commission has been quite explicit about their hope that the taxonomy can set the bar around the world for others to follow suit. The EU has an active environment and green economy programme with China. In the light of the official policy guidance the Chinese Government has already issued on green investment guidelines, their activities on green bonds and disclosure, and also given the burgeoning clean energy sector there, the Chinese would seem to be following next in line after Europe. It’s also worth noting the interest that the EU has stimulated elsewhere: notably in Canada, where an expert panel on sustainable finance (along the lines of the Commission’s HLEG in 2017/18) issued a report in June with some practical recommendations to help push “sustainable finance into the mainstream”; and in Japan where a number of “green” bond issuances have taken place, where a high-level green finance network has been established, and the Economics Ministry is showing interest in what Europe is doing.


  • last, within the global context, the next 16 months (in the run-up to and including COP 26) will be pivotal to unlocking a step change in international climate action. Campaigners will be hoping that the dynamic between Europe’s green taxonomy and the political backdrop can generate an exponential growth in green finance markets and frameworks globally– or at least one that can create the right environment for the next decade. Article 2.1.c of the Paris Agreement – “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” – will be pivotal to tackling the climate emergency.


For further information, please contact Shuen and Richard at Sustineri. /

The Role of Pension Funds in Addressing the Low-Carbon Transition: Key Takeaways from Chatham House Meeting, 1 July 2019

On 1 July 2019, as part of the UK’s inaugural London Climate Action Week 2019, Sustineri, Pensions for Purpose and The Prince’s Accounting for Sustainability Project (A4S) co-hosted a roundtable at Chatham House. The purpose of the gathering was to highlight major challenges and discuss pragmatic solutions in the UK pension fund industry in order to help drive systemic change in addressing climate-related risks and opportunities in pension portfolios. We convened senior representatives from Local Government Pension Schemes (LGPS), occupational pension schemes and the policy/regulatory community – including a keynote speech from Parliamentary Under-Secretary of State for Pensions and Financial Inclusion, Guy Opperman, and scientific insights from Professor Jim Skea, Chair of Sustainable Energy at Imperial College and Co-Chair of the IPCC Working Group III.


In a rich and varied discussion, policymakers heard from pension funds about what would help them to deliver on the climate goals. Pension funds also heard from government about what they can do to enable us to reach our common goals.

The key takeaways from the discussions were:

  1. Climate change poses a systemic and material risk to portfolios

The science is clear and irrefutable. It is vital for trustees of pension funds to address climate risk as part of their fiduciary responsibility. Climate change should not be treated as something separate, but should be assessed with equal importance to other economic risks. Recent regulatory changes have underlined the expectation that climate risk is treated as a financial risk, but this is not universally acknowledged among pension funds.

  1. Pension funds are responding, but more urgency and awareness is needed

A growing number of pension funds are addressing climate risks for example through low-carbon funds, investment exclusion polices and TCFD-aligned disclosure and reporting. However, participants noted that many trustees are not ‘climate competent’ or aware, putting their portfolios at risk.

  1. Investing to achieve net zero emissions by 2050 while building in resilience to address physical risks

Reducing the carbon exposure of funds, and testing whether portfolios are consistent with limiting the increase in global average temperatures to 1.5 degrees, is important. At the same time, pension funds need to invest in resilience to protect their investments from the physical risks of climate change as far as possible. These two goals can be mutually reinforcing.

  1. UK’s 2050 net-zero target

Participants welcomed the UK Government’s 2050 net-zero target. But investors need a joined up response across government, with policies adopted in the near term to help deliver that target, such as a coherent renewables policy and stronger carbon pricing.

  1. The need for policymakers and regulators to be more joined up

LGPS and occupational pension schemes are currently governed by different government departments and regulatory regimes, and would benefit from a more consistent policy approach. In addition, there was a view that there needs to be coordinated action across each relevant regulator covering business and the wider financial community, for example around reporting requirements along the investment chain.

  1. Opportunities of the transition

Pension funds should focus on the opportunities arising from the transition to a low carbon economy, as well as the risks. This includes a recognition that private markets are becoming more important for investors (taking into account the challenges that private markets pose, such as a lack of transparency).

  1. Looking beyond carbon and energy

The low-carbon transition is not just about the carbon and energy sectors. There will be impacts on other sectors such as the heavy industry and automotive sectors, land use and agriculture (note the IPCC will be publishing a special report on land use and food security in the autumn). More guidance is needed to help pension funds understand and respond to risks and opportunities in these sectors.

  1. The collective strength of pension funds

Pension funds have real power to influence other actors in the investment chain on the low carbon agenda, including asset managers and investment consultants. This influence is significantly enhanced when collective action is taken and pension funds share insights with one another. Market signals from investors matter, including on engagement such as shareholder voting at AGMs.  In addition, pension funds should demand more granular reporting and transparency on climate-related risk factors from their investment/asset manager at fund-specific level.

  1. Challenges when investing in pooled funds

Specific challenges exist for pensions investing primarily in pooled funds, with trustees finding that they are unable to influence the engagement and voting policies of funds in which they might be invested.

  1. Importance of civil society action

Civil society is mobilising on climate change, as evidenced by the school strikes and the rise of Extinction Rebellion. Beneficiaries (although many need to get further engaged) are also attaching greater importance to where pension funds are investing their money. Investors and companies who lag behind are increasingly vulnerable to being called out for inaction.

Please refer to the Minister’s speech here.

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Sustineri at London Climate Action Week 2019

July 2019

As part of the London Climate Action Week, on 1 July, Sustineri, Pensions for Purpose and The Prince’s Accounting for Sustainability Project (A4S  co-hosted a roundtable discussion at Chatham House on The Role of UK  Pension Funds in the Low-Carbon Transition. Representatives from local government and occupational pension schemes, and the policymaking and regulatory community, took the opportunity to discuss how they can individually and collectively respond to the climate emergency, addressing the challenges, risks and opportunities that it presents.
Key guest speakers were Guy Opperman, Under-Secretary of State for Pensions and Financial Inclusion at the Department for Work and Pensions (DWP), and Professor Jim Skea CBE FEI FRSA HonFSE, Chair of Sustainable Energy, Imperial college and Co-Chair IPCC Working Group III.
The Minister’s remarks – which addressed head-on the actions that pension funds and trustees can take, the power that they possess to drive change, and the “massive role” they have in terms of the transition – can be accessed here.
The co-hosts of the event also captured and distilled the key takeaways of a rich and varied discussion. Under the Chatham House rule, there are no remarks individually attributed. The tenor of the interventions around the table was that climate and the transition are being taken seriously, but that much more needs to be done – especially against the backdrop of the growing urgency of the challenge – and that, for their part, pension funds would welcome a more coherent approach across Whitehall on this agenda that also connects with the wider ecosystem.
As a backdrop for our discussion, Sustineri and A4S published a joint article in the FT’s Pensions Expert on the vital role of pension funds in addressing the transition – here.


For any questions, please do not hesitate to contact the partners of Sustineri.


Merseyside Pension Fund: Future-proofing its Responsible Investment Strategy

January 2019

Sustineri is pleased to announce that we have successfully completed an initiative with Merseyside Pension Fund (MPF), a large Local Government Pension Scheme in the UK.

This exercise involved working with a variety of internal and external stakeholders, with the objective of reviewing the schemes’s Responsible Investing strategy to future-proof their broader investment strategy. We hope that the emphasis throughout the whole process on strengthening investment beliefs through engagement and inclusivity can act as a model for when other pension funds (public and private sector) come to revise their responsible investment strategies, an agenda which is becoming increasingly important and material for asset owners.

Details of our report and recommendations can be found on the Merseyside Pension Fund website – here.

ClientEarth and Sustineri publish report on ‘Market Standards on Climate-related Risk for Asset Owners’