Green Taxonomies: China, EU, and Common Ground Taxonomy

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  • Green Taxonomies: China, EU, and Common Ground Taxonomy

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    After the UK first announced its 2050 carbon neutrality by legislation in 2008, as of 2020, 30 countries and regions worldwide had proposed their carbon neutrality targets. Among them, as a member of Paris Agreement, China also promised to peak the country’s carbon emissions by 2030 and reach carbon neutrality by 2060 in September 2020, contributing to the ease of global temperature increases.

    To achieve those goals, sustainability and green development have attracted increasing attention around the world in recent years. To define green economic activities, different countries and organizations have published various classification catalogs, or taxonomies, such as the Climate Bond Standard (CBS) released by the Climate Bond Initiative (CBI) and the EU Taxonomy. After clarifying green industries, green enterprises, green projects, or green products and services through green taxonomies, capital flowing into these activities would be regarded as green investment. This is conducive to the formulation of consequent governmental policies to guide investments into green projects and supervise the implementation and information disclosures.

    This report will introduce the green taxonomies issued in China and the EU, as well as expectations on the upcoming Common Ground Taxonomy under the collaboration between the two parties.

    China’s green taxonomies

    Earlier in 2012, China’s former CBRC (merged with CIRC into CBIRC in 2018) had issued the Green Credit Guidelines for banks, as part of the implementation works for energy saving and emission reduction under the 12th Five-Year Plan (FYP), from 2011 to 2015. Following the guidelines, the former CBRC launched the statistical system and evaluation system for green credits in 2013 and 2014, respectively, establishing a Chinese green credit policy system. Through those policies, the Chinese financial regulator specified statistic requirements of 12 energy-saving and environmentally friendly projects and services for green credits.

    In December 2015, PBoC issued the Green Bond Endorsed Project Catalogue. The catalogue divided different green projects into six main categories and 38 sub-segments, and its preparation referred to the Green Bond Principles (GBP) and CBI. The central bank also specified that green economic activities should focus on three purposes, environmental improvement, climate change response, and conservation and efficient use of resources. The original version had three differences with the international standards, which were involving clean coal usage projects, supporting the development of new energy vehicles (NEVs), and excluding some clean transport and drinking water infrastructure construction projects. The catalogue’s 2020 version was released for public consultation last May, which removed the projects related to the clean uses of coal and other fossil fuel energies, in alignment with international standards.

    Later, the Chinese government released the Green Industry Guiding Catalogue in 2019, which, for the first time, defined the range of green industries. The guidance included six primary categories with 30 second-level and 211 third-level categories, regarded as a baseline for the stipulation of afterward green standards like green enterprise standard and revisions of existing policies such as the above green bond project list. The six primary categories are energy conservation and environmental protection, clean production, clean energy, eco-environment, infrastructure green upgrade, and green services. [For more information about China’s green development, please read China’s Green Finance Overview: Standardization Framework and Current Market Scale.]

    EU Taxonomy

    The EU first released the Non-Financial Reporting Directive (NFRD) in 2014, listing several key information points regarding ESG factors that EU companies must report. Then, the EU issued the Sustainable Finance Disclosure Regulation (SFDR) in December 2019, which has taken into force in early March of this year. SFDR orders financial firms to disclose ESG information from entity and product level and could push investment firms for considering ESG related impact during the decision-making process and giving a priority to green projects. [For more details of the SFDR, please look at EU SFDR Has Arrived: What it Means for All Investment Managers & Advisors.]

    Following the two reporting requirements, European Commission launched its Taxonomy for the definition of green economic activities in June 2020. The EU Taxonomy sets six environmental objectives:

    • Climate change mitigation
    • Climate change adaptation
    • Sustainable and protection of water and marine resources
    • Transition to a circular economy
    • Pollution prevention and control
    • Protection and restoration of biodiversity and ecosystems

    With the six objectives, the main principle of green activities in the EU Taxonomy is to contribute substantially to at least one of the objectives while not significantly harm any of the rest. Specifically, for the first objective, the guidance points out eight primary industries, covering around 93.5% of direct CO2 emissions in the EU, including: forestry; agriculture; manufacturing; electricity, gas, steam, and air conditioning supply; water, sewerage, waste, and remediation; transport and storage; information and communication technologies; as well as construction and real estate activities. For the second objective, the Taxonomy also lists three main areas, buildings, financial and insurance activities, and professional, scientific, and technical activities.

    Common Ground Taxonomy

    Apart from separate green taxonomies, China and the EU now are jointly leading the development of the Common Ground Taxonomy (CGT) under the International Platform on Sustainable Finance (IPSF) Working Group on Taxonomies, which is expected to be published by mid-2021. An international common standard like the CGT could facilitate the development of the global green market and combine different countries’ green finance markets. Hong Kong Monetary Authority (HKMA) and Hong Kong Securities and Futures Commission (SFC), which have also joined the IPSF in addition to the Chinese Mainland, have claimed that the city will adopt the upcoming common rules. Hong Kong financial regulators have set this as one of the five near-term action points in the city’s green finance strategic plan released on December 17, 2020, although IPSF has yet disclosed any details about the CGT so far.

    In general, most of the green economic objectives and activities defined in China and the EU’s green taxonomies are similar, implying the feasibility of the CGT, though the same industries and activities may have different names in each taxonomy. Nevertheless, due to the gap of economic development stages, China currently emphasizes pollution control and environmental protection, while the EU focuses on climate change impact. For example, China’s Green Bond Endorsed Project Catalogue includes construction and operation of rural garbage and sewage treatment facilities, prevention and control of agricultural waste pollution, and else, but the EU already solved agricultural pollution issues and now eyes other agriculture-related emission reduction practices. Besides, both China and the EU have some taxonomy-listed activities that are not covered in each other’s catalogs, which may lead to future adjustments and supplements of their domestic green taxonomies based on the co-development of the CGT.

    The biggest difference between the two parties will be the technical standards for screening green projects. Although it is hard for China and the EU to unify their technical standards due to the development and policy gaps, China could refer to EU’s standards to improve its screening and evaluation frameworks for green projects. Most importantly, China still has not published special environmental information disclosure requirements or guidelines for green investment practices. Based on the collaboration with the EU on the CGT, China could also use the EU Taxonomy’s information disclosure frameworks for reference to establish the country’s own reporting guidance and promote the information transparency of green investment.

    References:

    http://greenfinance.xinhua08.com/a/20200518/1937474.shtml

    https://www.yicai.com/news/100958501.html

    https://kns.cnki.net/KCMS/detail/detail.aspx?dbcode=CJFD&filename=JRZH202010005

    https://d.wanfangdata.com.cn/periodical/zhaiq202004016

    http://www.cdmfund.org/27932.html

    http://www.gov.cn/gongbao/content/2012/content_2163593.htm

    https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en

    https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32020R0852

    https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=20PR128

    https://www.hkgreenfinance.org/draft-for-public-consultation-of-green-bond-endorsed-project-catalogue-2020/?lang=zh-hant

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