January 2021 marks a critical moment in the development of the EU Taxonomy on sustainable finance. Currently under public consultation until 1st January, a first draft is widely expected to land soon after the consultation window closes.
While ultimately a noble and essential endeavour, the taxonomy has been subject to criticism from the start.
However, it is a reality that the sustainable finance sector will have to get onboard with, and this means its something that marketing and communications professionals should be focusing on, now.
What is the EU Taxonomy?
The European Commission – an eco-warrior of epic, institutional proportions - put forward its action plan on financing sustainable growth in March 2018. Steered by the EU Technical Expert Group on Sustainable Finance (TEG), the taxonomy was a critical part of this which essentially meant that there was some consistency in what could be classified as sustainable activities. The FT has coined it the first green gold standard.
The idea is that to be eligible under the taxonomy criteria, activities need to meet one of the Commission’s six environmental objectives (such as climate change adaptation, climate change mitigation) and ensure they avoid significant damage to other environmental objectives, such as protection of water resources, and transition to the circular economy.
Opening a Pandora’s box of terminology
The challenge with sustainable finance and investing is that up until now it has been often misunderstood or left open for misinterpretation. Cognito’s Vice Chairman Andrew Marshall wrote in his recent review of the FT’s Alice Ross’ new book on sustainable investing, "Investing to Save the Planet", that “there is much confusion around the alphabet soup of terminology” when it comes to ESG and sustainable investing.
The worry is that this void of consistent classification across sustainable activities has left room for greenwashing – or making consumers think a product is green, when it in fact isn’t. Something that both large and small firms have been accused of.
The Commission has long sought to correct the inconsistency, stamp out greenwashing, and make the whole idea of sustainable finance easier for consumers to fathom, with the environment reaping the ultimate rewards.
Both specific and broad at the same time, there are concerns that the taxonomy will apply a brush that is too broad, or not broad enough, in various places.
This has led to fierce debate. Many commentators are concerned that the hard-line taken by the taxonomy on some products, and the leniency on others, will mean that the issues the taxonomy is looking to fix will still persist, such as greenwashing, as firms spot opportunities for product “arbitrage”.
Clashes have already started. Global Capital reported that Green bond issuers have groaned at the fact the TEG only considers real estate sustainable if it gets an ‘A’ in its Energy Performance Certificate. That’s only 1% of the buildings in the EU, meaning that green bonds based on mortgages will no longer apply when compared to the taxonomy. Critics also say that the taxonomy’s treatment of biofuels as sustainable is too simple – for example it classifies wood and ethanol sustainable, when in reality, they still omit carbon and other pollutants.
For banks, many of which are experienced issuers of green bonds and sustainable financial products, mapping these products to the taxonomy is nigh on impossible due to fact they don’t often classify activities as sustainable, but rather the whole product itself.
As of December 15, over 130 NGOs and climate experts have criticised the taxonomy and called for it to be more closely rooted to science. One concern they some have flagged is that under the current taxonomy, coastal shipping vessels are considered green, when the truth is in fact the opposite. So, there is still work to be done.
A key challenge: disclosure
The communications implications, and opportunities, of the taxonomy are massive. With firm direction from the Commission on what constitutes sustainable finance, and what doesn’t, firms that want to sell sustainable financial products now have the opportunity in 2021 to communicate loud and clear.
But this will take some work – it’s not just going to be about about clearly labelling sustainable products so that they don’t get side-lined by the regulator, or just bigger and louder advertising.
Disclosure is the first challenge. For example, asset managers that sell to EU-based clients funds that have an environmental or ESG objective, will need to disclose this against the taxonomy and its criteria, if they want to promote the fund in this way.
This will need to be done by the end of 2021 in readiness for the deadline on 1 January 2022, and for many managers this could mean a deep look at the taxonomy and an overhaul of what they market as environmental. All new investment products - including insurance, pension and retail products – will also be impacted in this way. Comms activity related to these products will need to adapt quickly as well.
The inevitable compliance burden that comes with a new set of rules is also intended to be a headache, with concerns that demonstrating compliance will be demanding and something that smaller firms just can’t do.
Keeping ahead of the curve
Many of the challenges posed by the taxonomy, and the hurdles these present for communications and marketing, can be dealt with through planning and preparation.
For marketers and communicators, it’s going to be critical to keep an eye on the updates from the European Commission on the taxonomy. Following progress in real time and correctly interpreting the various iterations will mean that you can prepare your comms and marketing strategy accordingly, that won’t mean you lose out to competitors and are compliant with the rules.
While the taxonomy is still at a consultation phase, it’s important to understand the foundations on which it is built – namely the six environmental objectives of the EU. If you can understand these and how your products and business relate to this, you’ll be giving yourself a head start.
Starting to have a voice now is critical. Many of your spokespeople will already have spoken about sustainable investing and finance, but engaging with the consultation and the first draft, and demonstrating a point of view on the taxonomy is the best way you can start to further your firm’s profile on a painful, inevitable, but critically important piece of European legislation.
Charlie Morrow is a director in the London office