Mr Valdis Dombrovskis Executive Vice-President of the European Commission

Ms Mairead McGuinness Commissioner for Financial services, Financial Stability and Capital Markets Union

Brussels, 9 April 2021

Dear Executive Vice-President,

Dear Commissioner,

The EU Taxonomy is the centre piece of Europe’s sustainable finance agenda and an important signal of climate and environmental ambition in Europe and globally. The decisions made in the next few days will have long-term and wide-ranging repercussions.

The Platform on Sustainable Finance (PSF), like its predecessor the Technical Expert Group (TEG), takes environmental science and the EU’s environmental goals as its starting point. This, together with the requirements of the Taxonomy Regulation, binds the Platform to build our recommendations on science and evidence, even if it presents uncomfortable realities about the challenges of transition to a climate-resilient, net-zero, environmentally sustainable economy. This approach informed the Platform’s advice to the Commission on the first delegated act under the Taxonomy Regulation in December 2020 and reflects the EU’s commitment to lead on mitigating climate change consistent with its 2030 and 2050 climate goals.

As you are aware, expert members of the Platform have expressed deep concerns about the environmental soundness of recent technical screening criteria, as regards economic activities related to fossil fuels, forestry and bioenergy. While the TEG and not the Platform developed the original criteria, expert members of the Platform have pointed out the risk of a considerable departure from a science-based approach. These concerns are compounded by the appearance that many elements of the Platform’s advice on the Delegated Act from December 2020 have been largely disregarded.

We respect that co-legislators and not expert groups of the European Commission ultimately determine EU regulations, and that the mandate of the Platform on Sustainable Finance is to make recommendations on the development of the Taxonomy. However, this experience raises a broader issue of concern to Platform members, specifically the weight that is attached to expert advice in the process of finalising Taxonomy criteria. As a result, we make the following comments and recommendations to the Commission to maintain the integrity of the Taxonomy and the value of the expert input process:

1. We seek to clarify the purpose and role of the Taxonomy. Many of the concerns raised by stakeholders regarding the Taxonomy and the draft delegated acts arise from misunderstanding the purpose of the Taxonomy framework as it is today.

2. The Taxonomy is not complete. We describe ways in which further development of the Taxonomy framework and additional transition finance tools can address legitimate concerns raised by stakeholders.

3. Finally, we provide comments on the technical process and governance for the adoption of technical screening criteria to ensure a robust process for finalising criteria.

What the Taxonomy is

For over four years, since the recommendations of the High-Level Expert Group on Sustainable Finance, the purpose of the Taxonomy has been to provide robust, science- based environmental performance criteria for green economic activities. This is reflected in the Taxonomy Regulation, which sets legal requirements for the development of technical screening criteria.

Reflecting this purpose, the Taxonomy has been designed to ensure investors, companies and other entities know which investments substantially contribute to environmental objectives (starting with climate change mitigation and adaptation) to encourage increased sustainable finance flows. In fact, the Taxonomy will only be relied upon if it provides credible, additional information for financial actors. This benefit has been central to convincing financial actors to accept and use additional regulation. If successful, the future financial disclosure framework in Europe should be equipped to prevent misstatements about the environmental contribution of finance at a time that sustainable financial flows are forecast to grow substantially.

We believe one consequence of this approach has been the misunderstanding among stakeholders that what is not defined as substantially contributing by the Taxonomy is not sustainable. This is not necessarily the case. This misunderstanding is clearly resulting in pressure to modify the Substantial Contribution (SC) criteria, for example in energy, forestry, and agriculture activities, which risks compromising the original purpose of the Taxonomy.

Deviating from environmentally sound parameters within the Taxonomy, by stretching the current Taxonomy framework beyond scientific rigour, introduces substantial risks to its intended purpose and to the credibility of the project overall.

We recommend that the Commission focus on the original purpose of the current Taxonomy framework in finalising the climate change mitigation and adaptation delegated act.

An incomplete tool

Many requests to weaken criteria in the Delegated Act stem from two issues: that the Taxonomy framework is not complete and that additional tools will be needed for sustainable transition.

In our recent Transition Finance report, we identified that corporate and entity transition plans, sectoral transition pathways and financial product labelling schemes can address many of the practical realities of encouraging finance to companies who are in a process

2 of transitioning. More work is needed on these tools to resolve the framework for transition finance, rather than stretching the current Taxonomy design too far.

Further, the Platform is working on, but has yet to resolve its recommendations under the current mandate on extending the Taxonomy framework to address additional Taxonomy categories. Recognising energy and resource efficiencies and greenhouse gas emissions reductions that support an ambitious transition, is legitimate and important to do even when the performance of underlying economic activities may not reach the level of substantial contribution. The differences between these more moderate environmental contributions and Substantial Contribution must not be confused.

We recommend that the Commission avoid weakening the criteria for substantial contribution where an extended Taxonomy framework or other transition finance tools would provide better solutions.

Ensuring a robust process

The credibility of the process to develop criteria will also determine the credibility of the Taxonomy.

In our December 2020 advice to the Commission on the draft Delegated Act, the Platform identified the importance of adopting credible, consistent and predictable criteria. Central to achieving this is the transparent use of scientific and market-based evidence in setting criteria. This approach supports sound criteria today and will also support recognition of new technologies and sustainable economic activities in future.

The Technical Expert Group that preceded the Platform on Sustainable Finance, published recommendations which included extensive and detailed rationale and justifications. The Platform expects to use similar rigour in its own activities to further develop the Taxonomy.

We recommend that the Commission show similar transparency and rigour (as expected of the TEG and the Platform) in explaining the evidence and rationale used to add or modify the criteria in the final Delegated Act.

Conclusions

In closing, we understand that the Commission will consider the climate and environmental science, the usability of the Taxonomy and a range of stakeholder perspectives when concluding the criteria. The very purpose of the Taxonomy is to provide a list of activities with performance levels that Substantially Contribute to environmental objectives. As such, any compromise agreement reached must still maintain the highest standards of environmental rigour.

Finally, as the Commission and the Platform prepare to introduce criteria for more environmental objectives and economic activities into the Taxonomy, we propose to work with the Commission to review the broader governance approach and roles for the Platform and the Commission, clarifying the steps for reviewing criteria and the boundaries of decision responsibility. We believe that such clarifications will be needed to ensure the members’ confidence that the Platform’s contribution to this critical project will be given due consideration to the benefit of the final outcome.

The Platform will continue to work with the Commission in the interests of a robust Taxonomy framework to encourage sustainable finance.

Yours sincerely,

Nathan Fabian, Platform Chair

Marzia Traverso and Ben Allen, Rapporteurs, Platform Technical Working Group

Nancy Saich, Rapporteur, Sub-group 3

Anjte Schneeweiß, Rapporteur, Sub-group 4

Helena Vines, Rapporteur, Sub-group 5