The Transition Traffic Light System: The EU Platform on Sustainable Finance’s Tool for Transparency

In its final report on the EU Taxonomy extension options supporting a sustainable transition the EU Platform on Sustainable Finance made a proposal for a transition traffic light system. This system aims to provide categorisation to assess the taxonomy alignment level of economic activities.

In this article, we will cover the following:

• What is the EU Platform on Sustainable Finance?
• The Report on EU Taxonomy Extension Options Supporting a Sustainable Transition 
• The Transition Traffic Light System: Categorisations
• Key Takeaway 

What is the EU Platform on Sustainable Finance?

The Platform on Sustainable Finance (PSF) is a permanent expert group of the European Commission that was established under Article 20 of the EU Taxonomy, with its first inaugural meeting being held on the 15th and 16th of October 2020. It is made up of 57 members and 11 observers who constitute a variety of experts that come from both the public and business sectors, as well as experts from the financial industry, civil society, industry, and academia. 

The primary objective of the platform is to further the evolution of the EU taxonomy. It does so by supporting the European Commission with progressing sustainable finance policies and assisting with the technical preparation of delegated acts, to ensure the EU Taxonomy is implemented.

Based on the mandate of the Platform in Article 20 of the EU Taxonomy, the members and observers started work on four main tasks to deliver key deliverables:

1. Advise the European Commission on the technical screening criteria for the EU Taxonomy, including on the usability of the criteria;
2. Advise the European Commission on the review of the EU Taxonomy Regulation and on covering other sustainability objectives, including social objectives and activities that significantly harm the environment;
3. Monitor and report on capital flows towards sustainable investments;
4. Advise the European Commission on sustainable finance policy more broadly.

The Platform is broken up into different sub-groups, each of which advises the European Commission on different aspects of the EU Taxonomy, namely: 

• Subgroup 1: The Technical Working Group;
• Subgroup 2: Subgroup on regulation review;
• Subgroup 3: Subgroup on negative and low impact activities;
• Subgroup 4: Subgroup on social taxonomy;
• Subgroup 5: Subgroup on data and usability;
• Subgroup 6: Subgroup on monitoring capital flows.

The first EU Taxonomy reports are due since the 1st of January! Greenomy offers a comprehensive new EU Taxonomy solution that aims to support investors, companies, financial institutions and auditors through the process and make sustainability reporting easy and cost-effective. Get in touch  to learn more about how Greenomy can help you comply or to book your demo!

This article will focus on the latest report by Subgroup 3 on extending the EU Taxonomy in order to expand access to transition-focused financing.

For more information about the PSF, its constitution, and its previous work, click here.

The Report on EU Taxonomy Extension Options Supporting a Sustainable Transition 

Although still based on the current provisions of the EU Taxonomy regulation, which focuses on green and sustainable environmental goal-based criteria, Nathan Fabian - Chairperson at the European Platform on Sustainable Finance - highlighted that the approach of this report differs from the current EU Taxonomy approach. 

During the webinar of the Platform on Sustainable Finance on the Extended Environmental EU Taxonomy, the issue of the EU Taxonomy potentially being too binary was raised by experts from the business community. There had been a worry amongst some companies that the EU Taxonomy would create a ‘green vs non-green` environment. 

Therefore, it became progressively clearer that multiple EU Taxonomy users could benefit from an extension of the EU Taxonomy framework to introduce other performance levels in transition, creating a nuanced landscape for businesses, allowing them to develop the KPIs companies need to integrate in order to transition. Doing so would enhance transparency, allow for more nuanced decision-making, and lend wider support to an environmental transition in the whole economy. 

Thus, rather than solely supporting green activities, the EU Taxonomy Extension Report aims to expand financing mechanisms for industries in transition, thus supporting a sustainable economic transition for activities to move away from significantly harmful levels of performance. 

In January 2021, the European Commission requested advice from the Platform on how to consider transition finance, especially for activities to move away from significantly harmful levels of performance. In response to this call, the Platform has attempted to define the categories of environmental performance and also outlined how activities can transition between the categories.

They highlighted that this was a step that was needed to establish a robust, sustainable finance framework that attracts finance for industries in transition. Plus, creating coherent definitions for transition finance that can be translated into global markets prevents the growing risk of transition wash.

The Transition Traffic Light System: Categorisations

Since the critical need for transition traverses all parts of the economy, the usable extended EU Taxonomy framework must address all six environmental objectives and all sectors. The Platform stated in its report that ‘An extended Taxonomy framework clarifies which activity, depending on its performance level, fits where, and hence what its transition should be within the overall system transition’. 

​​In brief, the Platform recommends the extension of the EU Taxonomy to recognise, on top of the already-recognised Green Activities under Article 3 of the EU Taxonomy, as:

• Unsustainable performance requiring an urgent transition to avoid significant harm (Red in transition to amber): These are activities that need to be improved urgently and could qualify for EU Taxonomy-recognised investment as part of a transition plan to avoid their current significantly harmful performance and move to intermediate performance levels.
• Intermediate (or Amber) performance: These are activities that operate between significantly harmful and substantial contribution performance levels and could qualify for EU Taxonomy-recognised investment as part of an intermediate/amber transition plan under which they continue to improve to stay out of significantly harmful performance
• Unsustainable, significantly harmful performance where urgent, managed exit/decommissioning is required (Red performance): These are activities that cannot be improved to avoid significant harm and will therefore remain always significantly harmful (ASH) and should be prioritised for EU Taxonomy-recognised transition investment as part of a decommissioning plan with a Just Transition effort.
• Low environmental impact (LEnvI) activities (White performance): These are activities that do not have a significant environmental impact and should not be regarded as either red, amber or green. This could allow enterprises or entities to show that their overall activities, while not considered green, do not cause environmental or social harm. It could also enhance their environmental credibility by ensuring that an entire portfolio, with several non-green investments, does not cause significant environmental harm. This classification should also encourage ‘LEnvI enterprises’ to access green EU Taxonomy-aligned finance for their green investments and expenditures.

Key Takeaway

In conclusion, the overall aim of the Extension of the EU Taxonomy Report is to provide transparency to better assess environmental performance at the economic activity level to develop a more inclusive taxonomy framework and therefore expand financing mechanisms for industries in transition. This will support a sustainable economic transition for activities to move away from significantly harmful levels of performance. 
 

The first EU Taxonomy reports are due since the 1st of January! Greenomy offers a comprehensive new EU Taxonomy solution that aims to support investors, companies, financial institutions and auditors through the process and make sustainability reporting easy and cost-effective. Get in touch  to learn more about how Greenomy can help you comply or to book your demo!