Firms looking to invest in China and EU receive guidance on green investment taxonomies

Firms looking to invest in climate-related, clean energy projects in the EU and China now have a roadmap that shows where green taxonomies overlap and where they diverge.

Released 4 November at the sidelines of the UN COP 26 conference by the 18-member International Platform on Sustainable Finance (IPSF) and spearheaded by the People's Bank of China (PBoC) and the EU, the Common Ground Taxonomy-Climate Mitigation report attempts to clarify the definitions of green investment based on an analysis of EU and Chinese classification systems.

The report's release coincides with the EU's discussions among its members about including natural gas and nuclear power as green investments that some see as antithetical to the Paris Agreement.

The purpose of the Common Good report is to shore up cross-border climate financing through greater transparency and clarity about the green taxonomies that the EU and China have independently developed for doing business in their jurisdictions.

Based on a two-year analysis of the two schemes, the report analyzed 80 economic activities across six industrial sectors, homing in on those as priority areas that contribute most to carbon emissions reduction or sequestration.

Within these six sectors—agriculture, forestry, and fishing; water supply; sewage, waste management, and remediation activities; electricity, gas, steam, and air conditioning supply; construction; and transportation and storage—the report homes in on activities where there is clear or identifiable overlap between the jurisdictions, where one jurisdiction is more stringent than the other, and where it is unclear.

Evolving Document

The IPSF said it will seek comment until 4 January on the activities that it has listed in the Common Ground Taxonomy Table, adding that this document will continue to evolve.

For instance, the common ground table identifies China as having more stringent criteria for investments in electricity generation using solar photovoltaic technology than does Europe. Conversely, the same table shows the EU as having more stringent criteria for steel and iron manufacture.

Both EU and China are seen as having clear overlaps in generating electricity from wind power and ocean-based energy and identifiable overlaps in the manufacture of green ships and use of low-carbon technologies on vessels, as well as the use of agricultural and forest waste to generate power and manufacture biofuels.

Strong international coordination

There were still some areas like buildings where it was unclear how the taxonomies would translate.

"Strong international coordination is crucial for facilitating sustainable finance flows at a global level," PBoC Governor Yi Gang told COP26 participants a day before the report's launch on climate finance day.

He said such a report was sought in the G20 Sustainable Finance Roadmap that also outlined actions to support coordination on disclosure, risk management, and transition finance. The G20 report was developed by a working group co-chaired by China and released in early October.

E3G, a European climate change think tank, said the report establishes an international framework for defining green investments across two of the world's largest GHG emitters, and guiding financial flows towards sustainable projects.

Prevents greenwashing

Given the high demand for green projects and investment, this is a really important first set of principles to guard against "greenwashing", Tsvetelina Kuzmanova, policy advisor on EU sustainable finance for E3G, a European climate change think tank, told Net-Zero Business Daily 5 November.

"If an investor or a company really wants to show their portfolio is green, then this is a very good first step to show you are really green," she added.

China's taxonomy applies to green bonds, while EU's taxonomy would apply across the board to banks, and large corporations.

More importantly, Kuzmanova said the Common Ground report approach and methodology, though not legally binding, can used as a "solid basis" by other countries that are looking to harmonize their green taxonomies on the global stage.

IHS Markit Climate and CleanTech Research Director Conway Irwin said the report can function as "rough guidelines for what constitutes 'green.'"

"But in jurisdictions where climate risk reporting is likely to be mandatory, standards will have to be both specific and clear as guidance for meeting disclosure requirements," she added.

The EU launched the IPSF in October on the sidelines of the International Monetary Fund and World Bank Group meetings to compare, identify, and develop barriers and opportunities to scale up environmentally sustainable financing and enhance international coordination where needed on issues. The IPSF's 18 members are responsible for 55% of the world's GDP, 55% of global population, and represent half the world's population, including China and India, but not the US.

Posted 05 November 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst