Nathan Fabian is Chief Responsible Investment Officer at Principles for Responsible Investment (PRI) and a member of the European Commission’s technical expert group on sustainable finance. Here, he explains what the expert group does, how it reaches out to stakeholders and why having a taxonomy is a good thing.

What exactly is the work of the expert group?

The technical expert group (TEG) is providing recommendations for the Commission’s legislative proposals on a taxonomy of sustainable economic activities and climate change related investment benchmarks, as well as recommendations for climate related reporting in the non-financial reporting directive and on a green bonds standard. This work is needed to help channel private finance to sustainable economic activities, such as those that would help realise the Paris Agreement on climate change.

The taxonomy work is identifying economic activities that substantially contribute to one of six environmental objectives, while not significantly harming the others. This will help individual and institutional investors identify sustainable investment opportunities through market disclosures and information. In other words, we want to provide dynamic tools to help investors understand the share of the financial returns of their investment products that come from sustainable economic activities.

Our work is focusing on climate change mitigation and adaptation first, because of the available market expertise and the urgency of the issue. However, the ultimate objective, as highlighted by the high-level expert group on financing a sustainable European economy and the Commission’s action plan on financing sustainable growth, is to channel capital flows towards assets that contribute to sustainable economic development. So, this work will eventually cover other sustainability issues as well. We expect the green bonds standard, the benchmarks regulation and the disclosure obligations to all contribute, along with the taxonomy, to channelling private financial flows to sustainable economic activities.

How do you engage with experts, stakeholders and others interested in developing work streams?

Our work, and particularly the taxonomy, is commanding a lot of attention from industry, investors and financial regulators around the world. This is encouraging, because it demonstrates its relevance and timeliness. This attention is also important because broad expert and stakeholder outreach is essential to ensure the robustness and usefulness of our recommendations.

The first formal taxonomy consultations were released on 8 December 2018. We are seeking comments on the methodology developed for the first round of economic activities that substantially contribute to climate change mitigation, and comments on the usability of this approach by 22 February 2019. We are also organising, with the help of the European Commission, workshops with additional experts on a second round of climate change mitigation activities, climate change adaptation activities and the development of ‘do no significant harm’ criteria.

The proposals on climate-related disclosures have been released and are open to consultation. You can find the paper here. We are also meeting with investment and industry representatives on benchmarks and the green bond standard.

To ensure we keep this process transparent to all, we provide regular updates on our deliberations and outreach on the Commission’s website.

You recently presented some preliminary conclusions on taxonomy. What would you say are some of the key features of taxonomy – and why is it a good thing?

The main reason to have a taxonomy is to provide a common language for markets on which activities are sustainable. This reduces transaction costs for all players, which encourages sustainable financial flows.

To create a good taxonomy, we are attempting to ensure a robust approach to assessing the contribution of economic activities to environmental objectives. We have been building on the work done by industry organisations and experts to develop a methodology that assesses the contribution to climate change mitigation of 24 economic activities. For each economic activity, we have defined a set of principles, metrics and quantitative or qualitative thresholds, ensuring the assessment of each economic activity’s contribution is robust.

Another key feature is that that we take an economy-wide approach. We are not limited only to clean technology or niche green industry. We are looking at the source of emissions in the economy and where the mitigation potential is. It allows us to find the processes and technologies that can substantially contribute to climate change mitigation. For instance, we cover transport, energy, buildings and are now working on agriculture and manufacturing in our second round – which will lead to further activities being proposed for inclusion in the Taxonomy.

What is your timeline for presenting recommendations to the European Commission?

Our mandate runs until June 2019, with the possibility to extend by six months for additional work on taxonomy. But it is important to remember that aligning financial flows with sustainable economic activities is a task that will need to continue. Technologies, our understanding of science and environmental and social challenges will continue to change. It will be necessary for policy makers and financial markets to change with them. I am heartened by the commitment of the Commission response so far, which is to see our work as part of a long-term commitment to sustainable finance.

TEG recommendations will include:

• Technical criteria for economic activities that substantially contribute to climate change mitigation and climate change adaptation;
• Minimum standard for the low carbon benchmarks and positive carbon impact benchmarks methodologies, and disclosure requirements for ESG benchmarks;
• Guidance on an update of the non-binding guidelines on non-financial reporting, and;
• Whether the European Commission should propose requirements on green bonds.