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European Bank for Reconstruction and Development moves forward on ‘green taxonomy’

22 November 2020 Kevin Adler

On 1 October, the European Bank for Reconstruction and Development (EBRD) announced the members of its newly created Platform on Sustainable Finance, its next step in developing standard definitions for green project criteria that will aid investment decisions by the Bank, private parties and governments.

Fifty experts and 10 special observers were chosen, comprising individuals with climate, environmental, sustainable finance and social or human rights expertise.

At the top of the Platform's agenda is categorizing terms that are related to the European Green Deal, announced last year. "Taxonomy regulation," that is, standardization of criteria and terminology that can be used by lenders, project developers and governments to assure that projects are supporting the effort to reach net-zero emissions by 2050.

"It will help create the world's first-ever 'green list' - a classification system for sustainable economic activities - that will create a common language that investors can use everywhere when investing in projects and economic activities that have a substantial positive impact on the climate and the environment," ERBD said in announcing the Platform. "By enabling investors to re-orient investments towards more sustainable technologies and businesses, this piece of legislation will be instrumental for the EU to become climate neutral by 2050."

The new group also will help support EBRD's mission of having at least 50% of its investments meet green criteria by 2025.

A Technical Expert Group (TEG) created by the EBRD started the taxonomy process in 2018, and its final report, released in June 2020, includes a "dictionary" of EU sustainable finance that will be the baseline for further refinement, said EBRD in announcing the selection of Platform members.

The TEG taxonomy is based on screening for climate mitigation objectives to reach net-zero in

2050 and a 50-55% reduction by 2030. Six criteria are at the core of the taxonomy, and these can be applied to any industrial activity from dairy farms to natural gas production to reforestration: mitigation of climate change; adaptation to climate change; water use; support of the 'circular economy'; pollution reduction; and ecosystems sustainability.

Also, for industrial sectors for which low-carbon solutions are not available, TEG set out two additional principles for projects seeking to qualify as green: 1. ensuring no lock-in of assets inconsistent with these goals, and 2. environmental performance well above the sector average.

This taxonomy is expected to receive final approval by the EU early in 2021.

Reporting under these criteria would be part of a company's disclosures if, for example, it was seeking to issue a green bond to support extension of a power transmission line or to build a new cement plant.

The new EBRD Platform on Sustainable Finance will make recommendations about how to add four new areas of consideration to the taxonomy: biodiversity, circular economy, water systems, and pollution prevention and control. "We will be strongly involved in sector groups and working on specific components such as the circular economy and on pollution prevention and control," said Carel Cronenberg, a TEG co-chair and a member of the Platform.

Importantly, the EBRD has the potential to expand this taxonomy beyond the EU because it operates in non-EU countries such as Bulgaria, Poland and Romania. "These countries have conditions that make it more challenging to implement some of the required threshold criteria, as well as of EU neighbors such as Turkey or Middle Eastern countries or Ukraine, so that the Taxonomy may be used outside the EU as well," Cronenberg said.

The Platform's members also will work with the International Platform on Sustainable Finance, which is working on its owns standards for sustainable development. "These platforms are both very good for helping develop this common language," Cronenberg said. "One role for the EBRD is to make sure that we are all talking about the same things and that we connect the dots. That's a key challenge."

Posted 22 November 2020 by Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit

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