An Investor’s Perspective on the Proposed Taxonomy for Sustainable Finance

Can stakeholders (regulators, policymakers and market participants) deliver a sustainable finance framework that serves the end-client well? The European Union’s technical expert group has just published its final recommendations on the taxonomy for sustainable finance, establishing common criteria to classify environmentally sustainable activities that support the transition to a low-carbon economy. Fresh from discussing the topic at the Responsible Investor Europe Conference in London, Julie Moret, Head of ESG at Franklin Templeton, offers some immediate feedback on the usability and implications for investors.

The need to build a workable framework for sustainable investment remains a priority for governments, regulators and investors.

But the wide range of constituents, all with varying priorities and directions, makes achieving commonality a real challenge.

At last, there seems to be consensus that the investment industry’s contribution to the sustainable finance agenda should move its focus away from ethical and values-based exclusions and negative screening, towards a more holistic understanding about environmental, social and governance (ESG) issues.

When it comes to consideration of climate change mitigation in particular, we’re seeing a shift of focus towards investment opportunities and investors’ role in financing the transition to a lower- carbon environment.

However, there remain some concerns about the effective application of a standardized taxonomy. These concerns may hinder the pace at which businesses and investors adopt the taxonomy and could stall the progress made on mainstreaming ESG integration.

Who’s Driving the Agenda?

Much of the impetus for driving forward the sustainability agenda comes from governments.

Nearly 200 countries have committed to Nationally Determined Contributions (NDCs), which embody their efforts to reduce national emissions and adapt to the impacts of climate change.

In Europe, we’re seeing the result of translating these commitments into hardwiring sustainability into capital markets to help finance the shift to a low-carbon economy.