4. Mapping of sustainable finance definitions and taxonomies

This chapter compares and maps sustainable finance definitions in the five jurisdictions in scope. The comparison identifies similarities (section 4.2), differences (section 4.3), and gaps, i.e. areas of sustainable finance that are not covered by existing frameworks (section 4.4). The purpose of the comparison is to provide a synthesis to inform policy makers and financial market actors about the degree of comparability amongst the definitions in scope. The comparison may be helpful to investors that operate in international capital markets. It may also usefully inform other jurisdictions wishing to develop sustainable finance definitions or taxonomies by raising their awareness about what approaches already exist. The comparison is based on an analysis of each jurisdiction’s definitions and taxonomies, which are presented in detail in Part 2 of the report. For brevity, the mapping in this chapter only provides summary features of definitions. The mapping is presented by sector, as most definitions are based on a sectoral approach.

A number of caveats should be kept in mind with respect to the comparison of existing definitions. EU taxonomy requirements are generally more developed than criteria in other frameworks because of the level of detail that the EC requested from the TEG in its recommendations for technical screening criteria. The EU taxonomy is the only definition that, in addition to setting criteria and thresholds for the main environmental performance area being targeted and considered (e.g. climate mitigation), also requires consideration of five other environmental performance areas. This consideration is mandated through multi-dimensional the “Do No Significant Harm” (DNSH) requirement. Other jurisdictions’ definitions and frameworks also consider multiple environmental objectives, such as climate mitigation and adaptation. However, they do not include any requirement comparable to DNSH, and are in this sense uni-dimensional. They only set criteria for the main environmental performance area under consideration, and do not require that criteria relating to other environmental performance areas be met simultaneously.

Some official definitions refer to the private, market-based Climate Bonds Initiative taxonomy. This is the case for the French GreenFin label for investment funds, and for the Dutch sovereign green bond. Thus, the CBI taxonomy has on occasion been included as a reference point in the mapping, even though it does not fall within the scope of the definitions considered in this report (i.e. definitions established in national legislation). Finally, one should keep in mind that the present comparison is based exclusively on the information identified for each set of definitions, which is provided in detail in Part 2 of the report. This information derives from sustainable finance definitions set out in law. English-language official versions were used, as well as an on-line translation tool from Dutch language to English in the case of the Dutch legislation. All principles, metrics and thresholds referenced in this material were taken into account. However, metrics and thresholds not included in this material are not reflected in the report. For instance, the metrics and thresholds for green buildings renovation in China exist at various levels of local legislation (province or city), but are not available in English as far as could be investigated. In this respect, the mapping presented below represents a best-effort approach to a topic that could be revisited. Such investigation would require appropriate capabilities, e.g. language capabilities and resources in order to access and process additional material.

In May 2020, the International Platform on Sustainable Finance (IPSF) set up by the EC carried out a mapping exercise for sustainable finance definitions and taxonomies, based on a survey questionnaire. The results will be presented in a report in October 2020. The survey covered the EC and China, which are included in the present report, as well as India and Canada, which are outside the scope of this report. The mapping exercise outlined a number of similarities between the EC and China taxonomies. For example, both taxonomies are mandatory. In terms of scope of application, both taxonomies address financial products, including green bonds and green loans. The overarching objectives and goals pursued are broadly similar, with the Chinese taxonomy oriented towards environmental improvement and efficient resource utilization, and the EC taxonomy having six interlinked environmental objectives. Both are binary in the sense that taxonomy compliance is a yes or no, and “different shades of green or brown” are not relevant. Both deal with economic activities and projects within selected sectors. A detailed examination of sector-level similarities is provided below.

This section focuses on the three sectors that were found to be present in all five jurisdictions. They are: forestry, renewable energy (hydroelectricity, solar and wind power generation), and green building construction and renovation. The specifications of each framework is mapped below for these sectors. While there are differences between jurisdictions, there is a degree of convergence between approaches and metrics for those sectors. Pending closer examination of local standards in certain jurisdictions, the approaches can be deemed to be relatively comparable among jurisdictions.

Forestry is included in all sustainable finance definitions. The criterion for forestry refers in most cases to sustainable forest management. In the EU, “Sustainable Forest Management” bears a specific meaning as it refers to a specific EU common policy framework (European Commission, 2020[1]). The CBI and Japanese criteria refer to commonly accepted international practices in Sustainable Forest Management, which include the most common certification schemes1. Therefore, among the different definitions, forestry criteria are not strictly identical, but are similar.

With the exception of China, all jurisdictions include hydropower in their definitions, with a reference to the CBI taxonomy threshold of 100g CO2 e /kWh. In addition to this threshold, the EU taxonomy applies stringent “do no significant harm” conditions to hydropower, while CBI also considers environmental risks, albeit with less precise requirements. China does not have an emission threshold and signals larger projects (above 50 MW) as being eligible for green finance, with no indications of conditions relating to environmental impacts.

On-shore solar power generation is eligible in all frameworks. The EU taxonomy uses its standard threshold of 100 gr CO2e per kWh for electricity generation. According to the CBI taxonomy criterion, an on-shore solar power generation activity is eligible if no more than 15% of power generation in the facility comes from non-renewable sources. There are no specific thresholds in the other frameworks as reviewed.

On-shore wind power generation is eligible in all frameworks. The EU taxonomy uses its standard threshold of 100 gr CO2e per kWh for electricity generation, while CBI allows the activity if no more than 15% of power generation in the facility comes from non-renewable sources. There are no specific thresholds in the other frameworks as reviewed.

Green building construction is eligible in all frameworks, but criteria vary. In the European Union, the Nearly Zero Energy Buildings Directive (NZEB) sets the standards from 2020 onwards. Both the CBI and the EU Taxonomy restrict eligibility to a version of best-in class: top 15% of performers in the local market in terms of emissions footprint (CBI), or buildings with primary energy demand 20% lower than NZEB (EU Taxonomy). In Japan, to be certified, green buildings must meet national level standards such as LEED and CASBEE. In China, there are standards for construction of green buildings at local level (province or city).

Green building renovation is eligible in all frameworks, but criteria vary. In the European Union, the Energy Performance Buildings Directive (EPBD) revised in 2018 is the reference standard. CBI allows the choice of a standard of relative performance (the top 15% best performers in the local market, based on emissions footprint), or absolute performance (the retrofit results in a “substantial reduction” in emissions). Similarly, the EU Taxonomy provides a choice: renovations either can bring buildings in line with EPBD requirements, or must achieve a reduction of at least 30% in primary energy demand. In Japan, national level standards such as LEEDs and CASBEE are used, and there are standards set at the level of regional or city authorities in China.

Three sectors -- non-renewable power generation, transport and manufacturing -- are covered in certain definitions but not in others. In the case of non-renewable power generation, there are varying approaches with respect to inclusion or exclusion of nuclear power, of gas fired power, and of supercritical coal fired power. For transport, some frameworks include aviation and shipping and others do not. For manufacturing, some frameworks include the transition of hard-to-abate sectors such as cement or steel manufacturing, while others do not. Those differences are mapped in more detail below.

The jurisdictions in scope vary significantly with respect to inclusion of non-renewable power generation, i.e. nuclear and fossil fuel based power generation. China appears to be the most inclusive. With respect to nuclear energy, the 2019 Guiding Catalogue for the Green Industry issued by the NDRC2 mentions the manufacture of nuclear power facilities as eligible under “clean energy Industry”3. Nuclear power generation is also eligible under the CBI taxonomy. Its status under the EU Taxonomy is subject to further study by the TEG or the Platform that the EC will set up as an advisory body on the Taxonomy Regulation and its implementation after the TEG dissolves in September 2020. In particular, further study will determine whether nuclear waste generation and treatment is compatible with the Do No Significant Harm requirement4. The French GreenFin Label excludes nuclear power generation and the nuclear value chain. There is no mention of nuclear power generation in the Japanese and Dutch definitions5.

With respect to gas, the Chinese NDRC green industry catalogue of 2019 includes “manufacture of unconventional gas exploration facilities” under “clean energy”. Furthermore, construction and operation of natural gas transmission, storage and load regulation facilities is included under “efficient operation of the energy system”. Gas fired power generation is not eligible under the CBI taxonomy framework. In the EU Taxonomy, gas fired power generation is eligible only if it meets the 100g CO2 e /kWh threshold in the EU Taxonomy. There is no gas eligibility in the other frameworks.

Regarding coal, the Chinese NDRC green industry catalogue mentions clean production and utilization of coal (under “clean and efficient utilization of traditional energy”) and upgrade and operation of coal-fired power generation units for flexible load regulation (under “efficient operation of the energy system”). No further specification of the technology is available at this stage. China is the only jurisdiction in scope where coal fired power is present in sustainable finance definitions.

The rationale for including ultra-supercritical coal in the NDRC green industry catalogue may have been its expected effectiveness in reducing particle air pollution for instance in places like Beijing. In May 2020 the press (Financial Times, 2020[2]) reported that a new green industry catalogue was published for consultation by the PBOC. This catalogue is available only in Chinese at the time of writing and was not consulted directly. The industry reports that the new version of the catalogue excludes coal and the production or utilization of natural gas. The catalogue was jointly issued by the PBOC, the securities regulator and the NDRC. It was announced that all financial sector regulators will be using the new catalogue.

All frameworks in scope specify that private and public passenger transport and rail freight are eligible activities. All frameworks cover waterborne transport, but in the case of the EU taxonomy, only inland water transport, not international shipping, is covered. Aviation for its part is covered only in the CBI and Japanese frameworks.

EU taxonomy criteria are generally more stringent than CBI criteria for private and public passenger or road or rail freight transport. CBI automatically accepts electric and hydrogen vehicles, including trains. For freight rail, CBI requires that no more than 50% of transported freight should be fossil. For vehicles, the EU taxonomy uses a zero tailpipe emissions criterion, with a phase-in; a maximum of 50 g CO2 e per passenger- km is admitted until 2025. The same criterion applies to passenger rail. For freight rail, the criterion is 50% lower than average reference CO2 emissions of heavy duty vehicles (HDVs) as defined for the Heavy Duty CO2 Regulation. Rail that is dedicated to the transport of fossil fuels is excluded.

Regarding cargo or passenger vessels, the CBI criterion for inclusion is “the use of low GHG fuel delivering substantial reduction in emissions per passenger or tonne per kilometre”. The EU Taxonomy criterion (which applies only to inland water transport) is more stringent, with a direct emissions requirement below 95g CO2 e per passenger-km for passenger waterborne transport. For freight (i.e. cargo) vessels, only zero-direct-emissions vessels are eligible, or those with direct CO2e emissions per tonne kilometre 50% lower than the average reference value defined for HDVs (Heavy Duty CO2 Regulation). Freight vessels used for fossil fuel transportation are excluded.

Regarding aviation, CBI’s criterion is the use of a low GHG emitting fuel, delivering substantial emissions reductions. The EU has not yet developed criteria for aviation. In Japan and France, sustainable finance definitions for aviation make reference to the CBI taxonomy.

The EU Taxonomy recognizes that some hard-to-abate industrial activities are necessary to supply the building of a low-carbon economy that will be compliant with the EU net-zero objective in 2050. Such activities are included as “transition activities” in the EU Taxonomy.

The EU’s reference point for manufacturing sector criteria has been the EU-Emissions Trading Scheme (ETS) benchmarks. For plants producing only cement clinker, as of February 2020, the EU-ETS benchmark value for cement clinker manufacturing is 0.766 tCO2e/t of clinker. Under the Taxonomy, plants emitting below this threshold are eligible. For plants producing clinker and cement, the specific emissions associated with the clinker and cement production processes must be lower than 0.498 of tCO2e/t cement or alternative binder.

Manufacture of primary aluminium is eligible if Criterion 1 is met in combination with either Criterion 2 or 3 below.

  • Criterion 1: Direct emissions for primary aluminium production is at or below the value of the related EU-ETS benchmark. As of February 2020, the EU-ETS benchmark value for aluminium manufacturing is 1.514 tCO2e/t.

  • Criterion 2: Electricity consumption for electrolysis is at or below 15.29 MWh/t (European average emission factor according to International Aluminium Institute, 2017, to be updated annually) (International Aluminium Institute, 2017[3])

  • Criterion 3: Average carbon intensity of the electricity that is used for primary aluminium production (electrolysis) is at or below 100 g CO2e/kWh.

Manufacturing of iron and steel is eligible if the GHG emissions associated with the production processes are lower than the values of the related EU-ETS benchmarks. As of February 2020, the EU-ETS benchmarks values for iron and steel manufacturing are, for hot metal, 1.328 tCO2e/t product, and for sintered ore, 0.171 tCO2e/t product.

For hydrogen, the criteria are threefold:

  • Direct CO2 emissions from manufacturing of hydrogen is at or below 5.8 tCO2e/t Hydrogen, in alignment with energy thresholds in the EU taxonomy.

  • Electricity use for hydrogen produced by electrolysis is at or lower than 58 MWh/t Hydrogen.

  • Average carbon intensity of the electricity produced and used for hydrogen manufacturing is at or below 100 g CO2e/kWh.

Only the EU Taxonomy has criteria in the manufacturing sector:

Some sectors of the economy are not covered by any of the sustainable finance definitions and taxonomies examined. Many of the frameworks are still relatively new and under development. For instance, both the EU and China have indicated their intention to update and possibly expand their respective frameworks to include new sectors in the coming months or years. It also is worth noting that these frameworks were developed before the occurrence of the Covid-19 pandemic and the resulting economic shock. New policy emergencies may arise in the future that could spur opportunities and actions to design principles and metrics for the inclusion of new sectors in sustainable finance taxonomies.

A case in point is aviation. Before the Covid-19 crisis, the EU had signalled its intention to consider eligibility criteria for the aviation sector in the Taxonomy in the coming years. Now, the aviation sector is a candidate for rescue finance packages in many jurisdictions, as governments attempt to address the economic impact of the lockdown. Important investments are needed to ensure an economic recovery, including by the private sector. The selection of criteria for the aviation sector in the Taxonomy could provide a basis for specifying setting sustainability-linked conditions for rescue financing for the aviation sector.

In the same vein, it is worth noting that the health sector is absent from all the frameworks covered by the present report. The pandemic situation may lead to additional investment in the health sector. In that context, the EU may wish to establish sustainability criteria for such investments.

The present economic context illustrates the fact that the emerging field of sustainable finance definitions is still a work in process, and needs to be adaptable as investment needs shift with economic and policy emergencies. At the same time, the overarching goal of putting economies on sustainable pathways cannot be lost from sight, given the degree of urgency of environmental issues.

In this respect, it is worth noting that none of the frameworks specifically covers so-called brown activities. As noted in the second part of this report, first chapter, paragraph 189, the EC signalled its intention to develop a brown taxonomy in the coming years. None of the frameworks specifically considers a “transition” taxonomy, although the EU Taxonomy includes enabling activities and activities in the process of becoming green (as described in Chapter 7 of this report). At the same time, a number of financial institutions have issued so-called “transition bonds” as an instrument to finance the decarbonisation of high emitting companies. The International Capital Markets Association (ICMA), which shepherded the development of the Green Bond Principles, has established a Working Group on Climate Transition Finance, which may be expected to develop principles or guidelines for transition bonds. In light of these developments, “brown” and “transition” definitions relevant to sustainable finance could increasingly become part of the collective policy toolbox in the future.

Keeping in mind the essential differences outlined in section 4.1, the sustainable finance taxonomies and definitions in scope are largely similar for renewable energy and green buildings. In those sectors, international investors can find a common language in existing legal definitions across jurisdictions. By contrast, in non-renewable power generation and transport, international investors will find that sectoral coverage is similar across jurisdictions but criteria for inclusion differ. The EU taxonomy is unique in its inclusion of some hard-to-abate manufacturing sectors such as cement, steel, aluminium and hydrogen, all in relation to the EU ETS mechanism for identifying the best environmental performers. Other frameworks do not include such sectors.

Finally, some sectors are not covered in any of the frameworks under consideration, such as health or aviation. Following the economic consequences of the Covid-19 lockdown, and massive additional investment in those two sectors, among others, it may be worth considering criteria under which investment in these sectors could be defined as environmentally sustainable.

References

[1] European Commission (2020), https://ec.europa.eu/growth/sectors/raw-materials/industries/forest-based/sustainable-forest-management_en.

[2] Financial Times (2020), https://www.ft.com/content/253f969c-37e0-42cd-9cdf-e06a5262fffe.

[3] International Aluminium Institute (2017), http://www.world-aluminium.org/statistics/primary-aluminium-smelting-power-consumption/#data.

Notes

← 1. Such as Forest Stewardship Council (FSC) or Programme for the Endorsement of Forest Certification (PEFC).

← 2. Based on an unofficial translation into English kindly provided by CBI. Also, refer to chapter “Sustainable finance definitions and taxonomies in China”.

← 3. Section 3.1.5 of the catalogue.

← 4. See chapter 7 EU sustainable finance taxonomy.

← 5. It was therefore considered that nuclear is excluded from these definitions.

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