Sean Kidney in Sydney

The Fifth Estate talks to Sean Kidney of Climate Bonds Initiative about a green list of economic activity being adopted by the European Parliament that could put the kibosh on unsustainable developments, such as new coal mines, by tackling demand rather than supply.

The European Parliament and the European Council of Ministers have reached agreement on the creation of a so-called green list – a classification system for sustainable economic activities.

Investors can use the list when investing in projects and economic activities that make a substantial positive impact on the climate and the environment.

It is intended to help scale up private and public investments to finance the transition to a climate-neutral and green economy, redirecting capital to economic activities and projects that are truly sustainable.

European Commission executive vice-president Valdis Dombrovskis called the framework “a game-changer in terms of tackling climate change because it will enable billions in green investments to flow”.

“Investors and industry will for the first time have a definition of what is green, which will give a real boost to sustainable investments. That will be crucial for the European Green Deal to become a reality.”

Sean Kidney of Climate Bonds Initiative, an international NGO working to mobilise debt capital markets for climate solutions, says the EU taxonomy (as its formally known) will underpin a whole range of European initiatives. Kidney is part of an EU technical expert group (TEG) which developed the list.

“Every large investment is going to have to report on climate risk,” Kidney tells The Fifth Estate.

“And if they want to, companies are going to have to report on how sustainable they are,” he says.

“And they all will. They will have to use the taxonomy. You won’t be allowed to do anything otherwise. Everyone wants to be seen as sustainable.

“Also, the European Banking Authority will have to use it, and so will corporates. So suddenly everyone is going to be saying, what is this?”

“This system of classification should lead to common global descriptors of green and sustainable activities while acknowledging regional and country level specificities,” he says.

Saving the planet through finance

The taxonomy isn’t an exhaustive list of environmentally sustainable economic activities, but it does define what constitutes them. It has six environmental objectives:

  1. climate change mitigation
  2. climate change adaptation
  3. sustainable use and protection of water and marine resources
  4. transition to a circular economy
  5. pollution prevention and control
  6. protection and restoration of biodiversity and ecosystems.

Within this, there are four requirements that economic activities need to comply with in order to qualify:

  1. to provide a substantial contribution to at least one of the six environmental objectives above;
  2. to do “no significant harm” to any of the other environmental objectives;
  3. to comply with robust and science-based technical screening criteria; and,
  4. with minimum social and governance safeguards.

From December 2021, the list will have to be used by member states and the European Union to define as environmentally sustainable all public measures, standards, and labels on financial products and corporate bonds.

It all started in Australia

Kidney says the Climate Bonds Initiative has been working on this taxonomy for the past 10 years.

“The National Australia Bank was the first commercial [outfit] to try it,” he tells The Fifth Estate.

“It’s matured since then and has had US$100 billion certified against it. It’s worth noting that one of the first investors on board interested in climate change was an Australian superannuation company.

“First, the Chinese government took it on and now the European government has.”

He says change is already happening.

“Just today I got an email from a Hungarian bank that will introduce a risk rating for banks’ green assets. Such assets will have a higher weighting factor. You’ll have a higher weighting factor as well if you have green bonds on your books.”

No more coal

The EU taxonomy is based on last year’s IPCC and International Energy Authority reports.

“It contains some surprises,” says Kidney. “In Europe we have to electrify everything, so electric grids are in there, and firstly, all new coal mines are out. Hydrogen is in.

“On transport – we’ve got five years to get to electric vehicles. Biogas has to get out of transport. Why? Because they want to use the biofuels for aviation to phase out kerosene.

“In areas where energy is complicated, there are caveats. For example, all biofeed stocks will be certified so there will be no deforestation or sidelining of food production in agriculture. As aviation biofuel kicks in, kerosene will phase out.

“Gas production is out – the IEA said that. The IPCC said that we have to have a 50 per cent reduction in emissions in 10 years or we’re toast – like parts of Australia nearly are. No new fossil fuel can qualify for investment.

“So the Adani mine is inconsistent with this. But it’s like the drugs trade; we can’t bring in the military helicopters to stop the mines. We have to tackle the demand. So we have to work on reducing demand in Beijing, in Seoul and so on.

“You won’t be able to build a new gas power station unless you have carbon capture and storage on it from day one and 100gmCo2/kWh is the threshold. This allows most hydro, geothermal, although not all of it, and no coal. Nuclear yes, because it is low carbon.”

However, there is another criterion that nuclear will be judged by: does it do harm? There are significant issues around disposal and decommissioning of nuclear plants.

“We have asked the European Commission to have a proper enquiry to figure out what to do about new nuclear, but it won’t start till 2021.”

The taxonomy covers 67 areas of society.

Zero carbon buildings

Under the list, all new buildings must be zero carbon by 2030.

“All refurbs must keep improving until they are zero carbon by 2050. This will be very recognisable to Australian investors,” says Kidney.

“The top 15 per cent of any market will qualify in terms of emissions performance of buildings. In Australia, we have the NABERS scheme that measures emissions, and issuers are using this methodology in Europe.”

However, he says it’s going to be tougher in Europe for new buildings than it is in Australia.

“In Europe, all public buildings from next year will have to meet the near zero standard and the following year all commercial buildings will. Regulations are driving this market, but we say you have to be 20 per cent better than that in order to qualify. We are being really ambitious.

“Even the European Banking Federation is backing this. It will have a flow on effect on every market in the world because investors report to their stakeholders and all around the world they will have to report on what they’re doing.

“Financial market participants will also have to disclose information on how and to what extent the investments that underlie their financial products support economic activities that meet all the criteria for environmental sustainability under the regulation.”

Any that do not invest in compliant activities will need to say so. They can also make a case to argue if or how they are sustainable.

Large public-interest companies with more than 500 employees will have to disclose how and to what extent their activities are associated with environmentally sustainable economic activities.

This classification system can also be used on a voluntary basis by any other body.

The EU hopes the taxonomy  will help companies raise finance for sustainable activities by encouraging them to publish the percentage of their turnover or investments that is in line with the “green list” of environmentally sustainable activities.

Green bond standard

The TEG is also devising recommendations for the development of an EU green bond standard, to make it easier to issue and compare these bonds. Cities and companies can issue them to raise finance for sustainable projects. The rules define what is sustainable.

It is also working on technical requirements for the EU Climate Transition and EU Paris-aligned benchmarks, to help put an end to greenwashing.

David Thorpe is author of the books TheOne Planet Life and the new One Planet Cities. He also runs on line courses such as Post-Graduate Certificate in One Planet Governance. He is based in the UK.