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Taxonomy opens up host of questions

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By Jasper Cox
17 Sep 2020

Market participants are still speculating about exactly how the EU's Taxonomy of Sustainable Economic Activities will shape sustainable finance.

The Taxonomy may become the top guiding framework for judging which economic activities count as sustainable.

"The idea is that in a market where sustainable finance is of growing importance, the market itself cannot work properly if everybody is in a position to define by themselves what is green and what is not," said Aldo Romani, head of sustainability funding at the European Investment Bank, speaking on a panel at the GlobalCapital Sustainable and Responsible Capital Markets Virtual Forum 2020 on Thursday.

Trisha Taneja, head of ESG advisory for capital markets at Deutsche Bank, said on the same panel that the Taxonomy "is often misunderstood to be compliance tool, when I think it is more of a disclosure tool". 

She said that investors were asking the market to use it so they can state how much of their portfolio counts as green.

Even though it is not yet finalised and approved, the Taxonomy already has users. Luxembourg has aligned a bond framework with it, and issued a bond off the back of that earlier this month.

"Market participants do not only pay attention to the Taxonomy on the issuing side, but also when you talk about banks and agencies, on lending side," said David Marques Pereira, ESG originator for debt capital markets at DZ Bank, speaking on the same panel.

Isabelle Laurent, deputy treasurer and head of funding at the European Bank for Reconstruction and Development, reckons that the Taxonomy has already had an impact on debt capital markets in a less direct way: through bringing to the fore a distinction between green activities, activities contributing to the transition to a low-carbon economy, and activities that enable those other two categories.

In contrast, she said the green bond market had historically focused more narrowly on climate change mitigation.

"That particular focus on these divisions and thinking about transition and enabling has galvanised the green bond market," she said, on the same panel. Recently ESG specialists have observed the emergence of the idea of the transition bond and the sustainability-linked bond.

One question is whether types of economic activity regarded as having a useful social purpose will receive some sort of classification in the future as well, in the same way as social bonds have taken off as a sub-category of sustainability-themed issuance.

However, this raises plenty of questions about how exactly social activities should be chosen and measured. "What is harder in the social sphere is defining impact," said Laurent.

Meanwhile, issuers and investors using the Taxonomy that is on the table now may have to grapple with it becoming stricter over time.

"Certainty there's a challenge, particularly for issuers that are looking to align green bond frameworks with the taxonomy," said Taneja.

Laurent added: "I think they will have to conclude whether they grandfather bonds from the start that are aligned with the taxonomy at the time that they're issued."

That could be particularly difficult when a security is matched to projects that are not funded straight away. If the Taxonomy criteria tightens, those projects could become ineligible after the point of issuance.

By Jasper Cox
17 Sep 2020