London – The European Commission’s action plan on sustainable finance includes introducing a common sustainable finance taxonomy. According to positive impact investor WHEB this should not be a ‘list-based’ taxonomy, but rather focus on a company’s underlying impact.
Environmental and sustainable investment has become a prominent topic even in mainstream media as of late. One big contributor is the work of the High-Level Expert Group (HLEG) on Sustainable Finance which issued its final set of recommendations to the European Commission earlier this year. The European Commission adopted many of these points in its recently published action plan on sustainable finance.
One of these recommendations is for the EU ‘to introduce a common sustainable finance taxonomy to ensure market consistency and clarity’. The report indicates that HLEG’s vision is ‘of a taxonomy that provides a shared EU classification of sustainable activities that is applicable for all types of assets and capital allocation’.
London-based positive impact investor WHEB is now actively promoting an impact-based approach and recommends avoiding a ‘list-based’ taxonomy. “We would caution against a taxonomy that is founded upon a list of products and technologies”, wrote the group’s head of research, Seb Beloe, in a recent post. “While this approach appears to be the most straightforward, we believe that, on its own, it would be both incomplete and quickly obsolete as the economy evolves. Even worse, the taxonomy could become a brake on innovation as the list would lag behind the real economy.”
Instead, the investor recommends that the focus of the taxonomy should be on the underlying impact, such as carbon emission reductions, or solid waste recycling. “Under each of these ‘impact categories’ indicative lists of the types of business and product that delivers this impact could be constructed. These would not be exhaustive and the onus would be on companies to demonstrate – and ideally quantify – how the positive impact is generated by the business or technology in question.”
WHEB sees more advantages in such an approach as it would accommodate new technologies where positive sustainable impact could be demonstrated. Other benefits listed by the investor include building an impact data set that investors and downstream users of the products could utilize in assessing and reporting their own impact.