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Sustainability Taxonomy Summary

Core Content

The document provides an overview of the EU's Sustainability Taxonomy, which aims to define what constitutes a 'green' investment and promote sustainable finance across the European Union. It outlines the taxonomy's purpose, structure, and expected impact on financial markets, asset managers, and investors.

Main Viewpoints

• Definition of Green Investments: The taxonomy offers a clear framework for identifying and classifying 'green' investments, focusing on activities that contribute to environmental objectives such as climate change mitigation and adaptation, sustainable water use, and pollution prevention.

• Market Impact: The taxonomy is expected to increase transparency and liquidity in the sustainable finance market by encouraging asset managers and insurers to create green funds that align with the taxonomy, or to disclose alternative methodologies.

• Benchmark Providers: Benchmark providers like MSCI, S&P, FTSE, Bloomberg, BAML, and Solactive are anticipated to align their green benchmarks with the taxonomy, potentially reshuffling their index families.

• Investor Demand: The shift in investor preferences toward green investing is expected to drive the adoption of the taxonomy, as investors demand more transparency and alignment with environmental goals.

• Regulatory Influence: The taxonomy will serve as a reference point for global regulators in developing legislation around climate change mitigation.

Key Information

Goals of the Taxonomy

• Translate the goals of the Paris Agreement and the UN Sustainable Development Goals (SDGs) into actionable investments.
• Provide a harmonised view across countries and industries to meet climate change goals.
• Redirect focus from measuring carbon footprints to encouraging investment in companies/assets that reduce greenhouse-gas (GHG) emissions.
• Reduce costs for issuers and investors by providing a uniform approach.
• Communicate how investment products meet environmental goals.
• Provide a basis for universal legislation across the EU.

Essential Functions

• What It Does:

  • Expand and clarify the definition of a 'green' asset.
  • Mitigate greenwashing by ensuring accurate environmental claims.
  • Enable uniform comparison of green investments.
  • Drive capital towards green investments.
  • Provide a list of economic activities and metrics that reduce GHG emissions.
  • Promote investment in various strategies and asset classes.
  • Establish science-based targets for environmental impact.
  • Allow for future updates and evolutionary changes in the taxonomy.

• What It Does Not Do:

  • Provide a rating list of 'good' or 'bad' companies.
  • Define a mandatory universe of investments.
  • Offer financial performance guidance.
  • Remain rigid or inflexible as markets and financial instruments evolve.
  • Address the social or governance factors of ESG.

Five-Step Application of the Taxonomy

1. Is the company engaged in an eligible business activity?
   The taxonomy includes technical criteria to classify 67 activities across seven sectors, which account for 93.2% of GHG emissions.

2. Does the company make a "significant contribution" to at least one of the specified environmental objectives?
   Assets must contribute significantly to one of the six environmental objectives: climate change mitigation, adaptation, sustainable water use, circular economy, pollution control, and healthy ecosystems.

3. Does the company "do no significant harm" (DNSH) to any of the specified environmental objectives?
   Business activities must not cause significant harm to any of the environmental objectives.

4. Has due diligence been applied to ensure ILO standards are met?
   The taxonomy includes basic compliance standards for social welfare under the International Labour Organisation (ILO) rules.

5. How much of the company's business activity is eligible under the taxonomy?
   The approach avoids binary labels and instead tracks the exact portion of a portfolio that supports the Paris Agreement and SDGs.

Example of Taxonomy Application

A portfolio equally weighted in five different industries yields the following taxonomy eligibility:

• Company A (Energy): 35% eligible
• Company B (Transport): 20% eligible
• Company C (Manufacturing): 40% eligible
• Company D (Communication): 70% eligible
• Company E (Agriculture): 25% eligible
• Overall Portfolio: 48% taxonomy eligible

Summary

The EU Sustainability Taxonomy is a comprehensive framework designed to standardise the classification of 'green' investments and promote sustainable finance. It is expected to have a significant impact on the market in 2020, with asset managers and insurers adapting to meet the new standards. The taxonomy provides a structured approach to identifying environmentally positive investments, encourages transparency, and aligns with global climate goals. While the taxonomy will not be binding in its current form, it is anticipated that investor demand and regulatory guidance will drive its adoption over time.

Market and Legal Considerations

• The document is a marketing communication and not independent research, and may be subject to conflicts of interest.
• It is intended for professional clients and eligible counterparties under MiFID II, and for persons with professional experience in investments.
• The information is not intended as investment advice and should not be relied upon for making investment decisions.
• Performance data is for illustrative purposes and does not guarantee future results.
• BNPP may have financial interests in the issuers mentioned, and may engage in transactions that could conflict with the views expressed in the document.

US and UK Disclosures

• US Disclosures: The document contains important disclosures regarding options, ETFs, and convertible securities, noting that some instruments may not be registered and are only available to certain investors.
• UK Disclosures: The document is communicated by BNPP London Branch and is not a prospectus. It is subject to the regulations of the UK Financial Conduct Authority (FCA).