Why is it that we keep putting off difficult decisions? There is always an excuse not to go on a diet, not to exercise, not to think about the welfare of the planet just yet. We keep postponing change until action is unavoidable, until it is almost too late. The Covid-19 crisis is exactly that type of moment. A global infarct that is compelling us to ask ourselves some fundamental questions.
For me, one thing is certain: if we choose to make excuses, more crises will follow. If we opt for profound change (read: sustainability of human activity), now is the time to think about the world after this crisis and the role that governments, companies, financial institutions and social organisations can play in it.
Take the problem of global warming. Manystudies show that we’re exceeding the limits of our planet. There is no doubt that we need to act. And we know what we want to achieve. For Europe, that’s a 50 percent reduction of CO2-emissions by 2030 and CO2 neutrality by 2050. The main question now is how we achieve that. For guidance on the answer, capital managers can orient themselves using the new European classification for green activities, the EU- taxonomy.
Besides the intended transparency about the environmentally-friendliness of financial products, the taxonomy also provides a reference framework for asset managers, banks and companies that want to make their products sustainable.
Sector-specific criteria provide a basis for the targets of companies and governments. Such as a maximum emission of 100g of CO2 per kilowatt hour for sustainable energy and emission criteria for steel and cement production. In this way, the taxonomy acts as a bridge between scientific scenarios and the situation on the ground. A bridge that is badly needed in order to accelerate the transition to a sustainable economy.
Routes for acceleration
For me, there are three important routes for this acceleration, in which the taxonomy can play an important role. Firstly, loans and obligations must start playing a more important role in the transition. The designers of the taxonomy therefore recommend that companies report ‘green’ capital expenditures (CAPEX) in addition to ‘green’ turnover.
The sustainable CAPEX can be financed by green obligations or loans, making it possible for companies to finance the transition. The relationship between ‘green’ turnover and CAPEX is an important forward-looking indicator for the transition strategy – and therefore the future readiness – of companies.
Secondly, the far-reaching harmonisation and verification of sustainability data for comparability and points of reference. An unambiguous report of scope 1, 2 and 3 emissions of companies and fund managers, for example, makes it easier for pension funds and other asset owners to measure their contribution. This helps the performance of managers and companies to make comparisons not just in relation to each other but also in relation to the European sustainability objectives.
Constructive dialogue needed
Thirdly, the taxonomy gives rise to a strategic dialogue between investors and companies. The sales of equity shares was never really a way to change the world. It serves, however, management of the risk profile of a portfolio. To enable sustainable change, now more than ever, we need a constructive dialogue about sustainable strategies with a focus on investment instead of divestment. Pension investors, such as PGGM, can play an important exemplary role in this. In this dialogue, the taxonomy provides a basis for the desired sustainability performances in each sector.
Making plans for sustainable investments while the economy has come to a standstill, sometimes feels paradoxical, also for me. But that’s exactly what we have to do now. As soon this crisis is over, we must be ready for a healthy recovery, a Green Recovery. We can use the taxonomy to make a diet plan for an economy that is social but also sustainable. It was Winston Churchill who said: ‘Never let a good crisis go to waste’.
Brenda Kramer is Senior Advisor Responsible Investment at PGGM and also a member of the Technical Expert Group on Sustainable Finance at the European Commission. In her columns for Fondsnews, in coming months she will focus on the practical consequences of the taxonomy for various sectors.