The European Commission's Technical Expert Group on sustainable finance (TEG) has published the climate-related part of an EU "taxonomy" – a system for classifying environmentally sustainable economic activities – and a report on the EU Green Bond Standard, along with an interim report on climate benchmarks. In addition, the Commission has published new guidelines on corporate climate-related information reporting.
What's a 'green' financial product? The European Commission's TEG has proposed a classification system for environmentally friendly activities and a standard for green bonds.
Taxonomy: what's it for?The taxonomy aims to provide clear guidance as to what "green" or environmentally sustainable activities are, which should help the designing of green financial products while dissipating fears of greenwashing.
It includes a list of economic activities that contribute to six environmental objectives:
- climate change mitigation;
- climate change adaptation;
- sustainable use and protection of water and marine resources;
- the transition to a circular economy, waste prevention and recycling;
- pollution prevention and control;
- protection of healthy ecosystems.
In order to be included in the taxonomy, an economic activity must contribute substantially to at least one of the objectives and do no significant harm to the other five.
The taxonomy covers a broader investment universe than that covered by traditional "green" investment criteria, including activities that could make a substantial contribution to carbon mitigation objectives but are not low-carbon today – iron and steel manufacturing, for example. The TEG takes into account three types of mitigating activities: low-carbon activities, activities that can contribute to transition and those that enable the former two.
The taxonomy also includes "Do No Significant Harm" (DNSH) criteria, offering investors guidance as to what potential adverse effects they need to take into account when investing in a particular activity and how to assess whether these are properly managed.
The taxonomy will be primarily – although not exclusively – used by investors. According to the Commission's legislative proposal  , for those funds marketed as environmentally sustainable, investors would disclose the percentage of holdings that are in companies carrying out taxonomy-eligible activities (or that would eligible under an alternative methodology) and the percentage of investments made that finance those activities.
However, the taxonomy is not mandatory for investments and investors would be free to explain their alternative methodologies in their disclosures.
It does not establish a standard or label for investment products, and was not designed with banks in mind. It is likely that much work will be needed to transform it into a tool that can be used in banks' and regulators' risk management processes.
However, banks will be able to use it as guidance when developing green financial projects for investors, and alignment with the taxonomy is necessary for compliance with the proposed EU Green Bond Standard. Green investment products structured using the taxonomy will gain in credibility, so taxonomy-compliant products are expected to be increasingly in demand from investors and companies.
The taxonomy was developed on the recommendation of members of the High-Level Expert Group on Sustainable Finance. The TEG will launch a feedback on parts of the report by early July.
Helena Viñes Fiestas, Global Head of Stewardship & Policy at BNP Paribas Asset Management and a member of the Technical Expert Group, said in a newsletter that the transparency and guidance the Taxonomy offers for directing investment towards sustainable objectives "is vital, as Europe needs to attract up to €290 billion a year of private capital into sustainable activities to meet climate goals alone".
Voluntary EU Green Bond StandardThe EU TEG also published an updated report on an EU Green Bond Standard (EU GBS), building on an interim report published in March and on responses to its call for feedback.
The TEG proposes that the Commission create a voluntary, non-legislative EU GBS to "enhance the effectiveness, transparency, comparability and credibility of the green bond market and to encourage the market participants to issue and invest in EU green bonds," it said in a two-page summary of the report.
The EU GBS would include four essential elements: alignment with the EU taxonomy, publication of a Green Bond Framework, mandatory reporting on the use of proceeds (an allocation report) and on environmental impact (an impact report), and obligatory verification of the Green Bond Framework and final allocation report by an external reviewer. While use of the Green Bond Standard is voluntary, the use of the term "EU Green Bond" is only permitted when all components of the GBS are met.
The TEG identifies the European Securities and Markets Authority (ESMA) as the most suitable European authority to design and operate such an accreditation regime for verifiers. As this will take time, it also recommends an interim voluntary registration process for external verifiers of green bonds for a transition period of up to three years.
Supporting the EU GBS
The TEG recommends a number of complementary measures to support and monitor the adoption of EU GBS. In particular, the European System of Central Banks (ESCB) and the members of the Network for Greening the Financial System (NGFS) should consider expressing and implementing a preference for EU green bonds when purchasing green bonds. The TEG also recommends that the Commission and EU member states encourage both institutional investors and issuers to use it.
The TEG says the Commission should also look into developing a full range of short- and long-term financial incentives to support EU green bond market alignment with the EU GBS.
Moreover, it recommends a review of the take-up and impact of the EU GBS within three years with a view to potentially considering further measures, such as legislation, to support its implementation.
The next European Commission will be responsible for deciding whether to take the TEG's recommendations forward – and how.
"With its EU Green Bond Standard, the EU builds upon the extensive work of the ICMA Green Bond Principles. We believe this standard will bring even greater clarity to the market by setting clear requirements, aligned to a large extent with today's best market practices in Europe," said Agnès Gourc, Head of Sustainable Capital Markets at BNP Paribas.
 The TEG's recommendations are designed to support the European Commission in the development of future delegated acts, as proposed in the taxonomy regulation. This regulation is still being debated by Member States in the European Council and will then be negotiated between European co-legislators and the Commission. The content of the regulation could still change significantly.