“For the first time, a uniform definition of what is ‘green’ is now available, so the time when we compared apples and oranges is over,” says SEB’s Head of Sustainability, Marie Baumgarts, who was a member of the Technical Expert Group that developed the taxonomy.
Work on the taxonomy is the most central part of the action plan for a green financial transition laid out by the European Commission on 8 March 2018. The overarching objective is to live up to the Paris Agreement’s target to limit global warming to 1.5 degrees Celsius.
“It means that in the long term a large number of industries will need to strive for net-zero emissions. It may sound like a utopian vision, but it is a seriously formulated set of activities and regulations,” Baumgarts explains.
The action plan calls for a steering of capital flows to activities that are positive for the climate. It involves creating transparency about how various activities affect the climate and ensuring that the financial sector prices climate risk in the right way.
What does the taxonomy consist of?
“It breaks down the Paris Agreement’s goal to limit global warming into concrete threshold values for all economic activities. In this way it specifies the pace at which emissions must be reduced to achieve the goal of zero carbon emissions in the EU by 2050. The taxonomy can be likened to a recommendation for daily energy intake for a person trying to maintain his or her personal health.”
For passenger cars this means, for example, that starting in 2025, CO2 emissions may only be a maximum of 50 grams CO2 per kilometre driven in order for a car to be classified as green under the taxonomy. From 2026 until 2050, emissions will be gradually reduced to 0 grams.
“For a person thinking about buying new car, this can have great significance since climate-neutral cars are expected to do better in the market with respect to second hand value and similar.”
In the same way, similar threshold values have been created for the manufacturing industry, real estate, energy, forestry and agriculture, to name a few examples.
“We are thus going from having had an abstract, global temperature goal to clear, narrowly defined targets for all economic activities in the market.”
The taxonomy covers sectors which together account for 93.5 per cent of emissions.
“This will be a major transition for the market. Everyone will need to draw up an action plan for how they will achieve climate neutrality by 2050, either by limiting their emissions or finding ways to capture and absorb carbon dioxide.
“Of course, we want to participate in and finance this transition. Capital is needed for modernisation and the technology transition. Here’s where we come in, both as an adviser and lender. On the investor side we need new analyses of which companies we believe will manage the transition the best.”
In December 2019 the European Commission agreed on a law under which the taxonomy would be compulsory starting in December 2021, i.e., that financial actors that offer products and advice will have to report their impacts accordingly. Moreover, all companies with more than 500 employees will be required to report their sales, capital investments and operating costs in accordance with the taxonomy, so the amount of data is expected to grow rapidly.
How does SEB need to transition in accordance with the taxonomy?
“We have worked long with sustainability and were involved in creating the first green bonds, among other things. It was a fantastic innovation that points out the path for what will apply for all capital flows in the long term. But with the new taxonomy it will be an entirely new playing field.
“Most likely new demands will be put on us as a bank to assess what impact we have on the climate through the businesses we finance and invest in. New demands will also be put on us to assess how the climate affects us, such as regarding credit risks.
“For example, for the past year, work had been under way to analyse the credit portfolio in accordance with the taxonomy’s definitions. We are working on drawing up instructions and a string of tools in support of the customer dialogue.”
In what ways will the taxonomy be noticed in the daily work at the bank?
“Our customers’ businesses will be affected, and therefore so will we. We now need to integrate sustainability with a starting point from the climate in everything we do, in all processes, routines and decisions. It is likely, for example, that pricing and valuations will be affected when it is now possible in a more uniform way than previously to factor in climate costs into business decisions.”