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InternationalPlatformonSustainableFinance

CommonGroundTaxonomy–Climate

ChangeMitigation

Instructionreport

IPSFTaxonomyWorkingGroup

Co-chairedbytheEUandChina

3June2022

Disclaimer

ThepresentreportrepresentsatechnicalworkbasedoncomparisonbetweentheEUandChinataxonomieswithinthescopeoftheinstructionreportwithnolegaleffectandisnotformallyendorsedbyIPSFmemberjurisdictions.Theresultdoesnotcreateeithera‘common’or‘single’standardthatismandatoryforIPSFmemberjurisdictions

3

Acknowledgements

ThisreportwasproducedbytheIPSFTaxonomyWorkingGroup,co-chairedbyMrMarcelHaagfortheEuropeanCommissionandDrMaJunforthePeople’sBankofChina.ItwaswrittenbytheIPSFTechnicalExpertGroupwithvaluableinputsbyIPSFmembersandobservers.TheIPSFSecretariatisparticularlygratefulfortheinvaluablecontributionsofSeanKidney,BridgetBoulle,andWenhongXie(ClimateBondsInitiative),BoluWang(TsinghuaNationalInstituteofFinancialResearch),XiaofengLi(ChinaInstituteofBuildingStandardDesignandResearch),WenqinLu(ChinaEnergyConservationandEnvironmentalProtectionGroup),andSiboSong(LianheEquator).

.

4

Contents

1.Executivesummary

6

2.Introduction

9

2.1.BackgroundandObjectives

9

2.1.1.BriefintroductionofIPSF’sTaxonomyWork

9

2.1.2.TheCommonGroundTaxonomy(CGT):purpose,objectivesandusers

9

2.1.3.ContributionoftheCGTtoglobalcomparabilityandinteroperabilityofsustainable

financestandards 11

2.2.OverarchingcomparisonoftheEUandChinataxonomies

12

2.2.1.Historyofdevelopmentprocess

12

2.2.2.Objectives

14

2.2.3.Scope

15

2.2.4.Approachestodefiningalignment/eligibility

17

2.2.5.Legalframework

19

2.2.6.Classificationframework

20

3.CommonGroundTaxonomyMethodology

24

3.1.Scopeofanalysis

24

3.1.1.Objectivesandscreeningcriteria

24

3.1.2.Prioritysectors

25

3.2.Sectionmapping

26

3.2.1.MappingagainstISICasaneutralcode

26

3.2.2.Challengesandsolutionsfound:codesmappedagainstmultipleactivities,activities

withoutacodeetc 26

3.3.Scenarioanalysismethodology

27

3.3.1.Descriptionofapproach:whatisascenarioanalysismethodologyandwhywasitused?

27

3.3.2.Scenariodescription

27

3.4.StructureofCGTClimate

28

4.OverviewoftheCommonGroundTaxonomy

30

4.1.Overviewofalignmentacrosssectors

30

4.2.DoNoSignificantHarm

30

4.3.MinimumSafeguard

30

4.4.Climatechangeadaptation-relatedactivities

31

5.Usability

32

5.1.Challengesandpotentialsolutionstoensuringusabilityforanalysis

32

6.Futureconsiderations

33

6.1.PathwaytoincludeareasnotcurrentlyincludedinCGT

33

6.2.Optionstoincorporateotherjurisdictions

33

5

6.3.ReflectionofTaxonomyprinciplesoutlinedbytheIPSF-UNDESAinputpaperto

theG20SustainableFinanceWorkingGroup 34

6

1.Executivesummary

InJuly2020,undertheIPSF,theEUandChinainitiatedaWorkingGroupontaxonomieswiththeobjectivestoundertakeacomprehensiveassessmentoftheexistingtaxonomiesforenvironmentallysustainableinvestments,includingidentifyingthecommonalitiesanddifferencesintheirrespectiveapproachesandoutcomes.InNovember2021,theIPSFTaxonomyWorkingGrouppublishedthefirstversionoftheCommonGroundTaxonomy(CGT)report,andissuedacallforfeedbacktosolicitcomments.ThispublicationisthesecondversionoftheCGTreport,whichnowincludes72climatemitigationactivitiesthatarerecognizedbyboththeEUSustainableFinanceTaxonomyandChina’sGreedBondEndorsedProjectCatalogue.

TheCGTisamilestoneworkresultingfromanin-depthcomparisonexercisethatputsforwardareasofcommonalityanddifferencesbetweentheEUandChina’sgreentaxonomies.Thisupdatedpublicationcoverstheinitialphaseofworkwhichwillbeexpandedovertime.

Thescopecoverssubstantialcontributioncriteriaforclimatechangemitigation,whilstotherenvironmentalobjectivesareyetnotcoveredatthisstage.Consideringthedifferenceoftheenvironmentallegislationsystembydifferentjurisdictions,othereligibilityfeaturessuchasDoNoSignificantHarmwerenotcoveredwithinscopeofthefirstphase.

TheCommonGroundTaxonomyis…

TheCommonGroundTaxonomyisnot…

?AnanalysisonapproachesoftheEUtaxonomyandChinataxonomy,andthemethodologyforcomparingandidentifyingcommonalitiesanddifferencesbetweensomefeaturesofthetwotaxonomies

-AlegaldocumentationbytheEUandChinawhichentailsrequirement/obligationforeitherjurisdictiontochangetheirtaxonomy.

?Anevolvingtoolthatmayhelpdifferentactorstounderstandthetypesofactivitiesthatcouldbecoveredundertherespectivetaxonomieswithinthescopeofthecomparisonexercise

-Asingletaxonomyorexclusivedefinitionofenvironmentallysustainableeconomicactivitiescoveringallenvironmentalobjectives,suchasbiodiversity,pollutionprevention,etc.

?Atechnicaldocumentforvoluntaryreferencebyinterestedpartieswithinthelimitsofthescopeofthecomparisonexercise

-CoveringalleligibilityfeaturesorallactivitiesintheEUandChinataxonomiesasexplainedintheinstructionreport.

?Ananalyticaltoolorreferenceforotherjurisdictionstoconsiderwhendevelopingtheirowntaxonomies

-Aproposalforinternationalstandardsorlegaldocumentthatimposesanyglobalstandardonotherjurisdictions.

TheCGTcanbeusedtoimprovethecomparabilityandfutureinteroperabilityoftaxonomies

aroundtheworld.Hence,itintendstoprovidemoreclarityandtransparencyaboutthecommonalitiesanddifferencesbetweenapproachesandeventuallylowerthetrans-boundarycostofgreeninvestmentsandscaleupthemobilizationofgreencapitalinternationally.Italsoprovidesasolidmethodologyonthebasisofwhichothertaxonomiescanbecomparedinthefuture.

ThemethodologyunderpinningtheCGTisakeypartofthevalueofthiswork.Thefirststageinvolved(1)extractclimatechangemitigationactivitiesfromtheChinaTaxonomy,(2)mappingofallactivitiesinbothtaxonomiestoaneutralcodesothattheycouldbemoreeasilycompared.The

7

InternationalStandardIndustrialClassificationofAllEconomicActivities(ISIC)wasusedastheinternationalreferenceclassification.(3)selectionofprioritysectorswhichwouldsignificantlycontributetocarbonemissionreductionorsequestration.

Thesecondstageinvolvedevaluatingthedetaileddescriptionandtechnicalscreeningcriteriaforeachlinetoascribeeachlinewithascenariobasedontheiroverlapasfollows:

?Scenario1:Areaswithclearoverlapscoversactivitieswhichhaveoverlapsandcanbeconsideredcomparablewithinthescope/forthepurposeoftheCGTreport.

?Scenario2:EUcriteriaaremorestringentand/ordetailedwasassignedtoactivitieswheretheEUscreeningcriteriawereeithernarrowerinscopeormorestringentand/ordetailedthanChinesecriteria.Inthiscase,theEUcriteriaweredescribedintheCGTingreaterdetail.

?Scenario3:Chinacriteriaaremorestringentand/ordetailedwasassignedtoactivitieswheretheChinacriteriawereeithernarrowerinscopeormorestringentand/ordetailedthanEUcriteria.Inthiscase,theChinacriteriaweredescribedintheCGTingreaterdetail.

?Scenario4:Identifiableoverlapwasassignedtoactivitiesthathavesomealignmentinscopeofactivities,andcouldbedefinedbyutilisingbothsetsofeligibilitycriteria.

?Scenario5/6:Unclearoverlaporobviousdifferentiation:Scenario5wasassignedtoactivitiesthatwereverydifficulttomapintheothertaxonomy.Scenario6wasassignedtoactivitieswheretherewasobviousdifferentiation.

TheCommonGroundTaxonomyanalysed79activitiesacrosssixsectorsintheInternationalStandardIndustrialClassificationofAllEconomicActivities(ISIC),Rev.4:

?Agriculture,forestryandfishing

?Manufacturing

?Electricity,gas,steamandairconditioningsupply

?Watersupply;sewage,wastemanagementandremediationactivities

?Construction

?TransportationandStorage

Thesearedetailedinthedocumentasfollowed:

CGTnumberand

activityname

EachactivityintheCGTisnumberedaccordingtoitsheadlinesectore.g.A1.1isAfforestationwhichisthefirstactivityundertheAgricultureandForestrysector.

Nameofactivity–ChinaorEUnomenclatureisuseddependingonthescenario(e.g.forScenario2activities,generallyEUnomenclatureisused)

Description

Descriptionofwhatiscoveredundertheactivity-ChinaorEUnomenclatureisuseddependingonthescenario(e.g.forScenario2activities,generallyEUnomenclatureisused)

Substantialcontributioncriteria

ScopeofactivityDescriptionofTechnical

screeningcriteria

Additionalnotes

ProvidesreferencenumberswithintheassociatedactivitiesintheEUand/orChinaTaxonomy.

Overlapscenario

Providethescenarioascribedduringtheresearch

Futureconsiderations

8

ThisfirstphaseoftheCGTpresentsadetailedanalysisoftheEUandChinaTaxonomies.Otherareasmissingcouldbeincorporatedintofuturework.Futureworkcouldinclude:

?AdditionalsectorssuchaslikeservicesandICT;

?AdditionalenvironmentalobjectivesastheyareagreedwithintheEUprocess;

?TransitionconsiderationsastheEUandChinataxonomiesandtaxonomiesfromotherjurisdictionsevolvetoincludemoretransitionconsiderations;

?Newareasofalignmentinexistingactivitieswheremappingalignmentwaschallenging,thereispotentialtodomoreresearchworktounderstandpossiblecommonalities;

?OthereligibilityfeaturessuchasDNSHandminimumsafeguardscouldbebroughtintostrengthenthecomparisonandinteroperabilitybetweenjurisdictions;and

?Otherjurisdictionswillbebroughtinastheirtaxonomiesarefinalised.

AnimportantpartoffutureworkisthatitdovetailswiththeworkoftheG20SustainableFinanceWorkingGroup(SFWG).AttherequestofG20SFWG,theIPSFandtheUnitedNationsDepartmentofEconomicandSocialAffairs(UNDESA)issuedaninputpaperwhichprovidesamappingandanalysisofexistingtaxonomiesandthoseunderdevelopment.1Thispapersetsoutthesevenhighlevelprinciplesforjurisdictionsandmarketsforthedevelopmentofcoherentapproachestoidentifyandaligninvestmentswithsustainabilitygoals.

TheseprinciplesandtheG20SustainableFinanceRoadmapwillhelpguidetheworkoftheIPSFandtheCGTgoingforward.TheIPSFTaxonomyWorkingGroupwilllooktoincludemorejurisdictionsinitscomparativeanalysis,andexploreoptionstofurtherenhancetheinteroperabilityofsustainablefinancetaxonomiesaroundtheworld.

1Improvingcompatibilityofapproachestoidentify,verifyandaligninvestmentstosustainabilitygoals(IPSF-UNDESAinputpaperfortheG20SFWG)

/wp-content/uploads/2021/09/G20-SFWG-DESA-and-IPSF-input-paper.pdf

9

2.Introduction

2.1.BackgroundandObjectives

2.1.1.BriefintroductionofIPSF’sTaxonomyWork

TheInternationalPlatformonSustainableFinance(IPSF)isamultilateralforumthataimstoenableexchangeofpracticesandincreaseinternationalcooperationonsustainablefinancerelatedmatters.Thisinturncontributestoscalingupthemobilisationofprivatecapitaltowardsenvironmentallysustainableinvestments.Partofthisworkfocussesondeepeningcooperationonthedevelopmentof“sustainabletaxonomies”aroundtheworldandtohelptomitigatefragmentationofglobalgreen/sustainabilitydefinitionsasfaraspossible.Overtwentyjurisdictionsaroundtheworldhavedevelopedorareintheprocessofdevelopingnationalorregionalsustainabletaxonomies(seeAnnex)2.Ofthesejurisdictions,ChinaandtheEUadoptedtheirrespectivetaxonomiesintolegislativeframeworks.

InJuly2020,theEUandChinahaveinitiatedaWorkingGroupontaxonomies(hereafterreferredtoasthe“WG”)co-chairedbybothjurisdictionsandopentoallIPSFmembersandobservers.TheWG’sobjectivesaretoundertakeacomprehensiveassessmentoftheexistingtaxonomiesforenvironmentallysustainableactivities,includingidentifyingthecommonalitiesanddifferencesintheirrespectiveapproachesandoutcomes.ThisworkhasbecomeknownastheIPSF“CommonGroundTaxonomy”.

2.1.2.TheCommonGroundTaxonomy(CGT):purpose,objectivesandusers

WhatistheCommonGroundTaxonomy?

TheCommonGroundTaxonomy(CGT)isareportresultingfromanin-depthcomparisonexercisethatputsforwardareasofcommonalitybetweentheEUandChina’staxonomies.ThefirstversionofthisCGTreportwaspublishedinNovember2021.ThispublicationisthesecondversionoftheCGTreport,whichincorporatesfeedbackreceivedfromthegeneralpublicbetweenNovember2021andJanuary2022,andincludesadditional“confirmed“activitiesthatwereconsideredas“pendingactivities”thatarenotcoveredinthefirstversion.ThecurrentversionoftheCGTcovers72climatemitigationactivitiesthatarerecognizedbyboththeEUandChinataxonomies.

ThecurrentversionoftheCGTcoversonlyareasthatareinthecurrentscopeofbothtaxonomies,intermsofobjectives,eligibilitycriteria,activitiesandthresholds.Ifthereareactivities,objectivesoreligibilitycriteriacoveredbytheEUbutnotChina(andviceversa),theyarenotpartoftheCGT.Todetermineeligibilitycriteriaforeachactivity,itputsforwardthecriteriathatarecompliantinbothjurisdictions–usuallythismeansreferringtothejurisdictionwithnarrowerscopeormorestringent/moredetailedcriteriaalthoughinsomecases,criteriaarethesame(andthereforedirectlyeligible)orinothersbothsetsofcriteriashouldbeused.

TheCGTdoesnotentailanylegalimplicationsineitherjurisdiction.ItonlycoversclimatechangemitigationobjectiveoftheEUtaxonomyandactivitiesconsideredmakingsubstantialcontributiontothesaidobjective.Thus,thedetailedactivitiesreferencedintheCGTtableaccompanyingthisreportshouldnotbeconsideredasautomaticallyalignedwiththeEUtaxonomy,ascertaineligibilitycriteriaoftheEUtaxonomy,suchastheDoNoSignificantHarm(DNSH)criteriaandtheminimum

2Ibid.

10

socialsafeguards,arenotconsideredbythisreport.TheCGTdoesnotyetcovertheclimatechangeadaptationobjectiveoftheexistingEUClimateDelegateAct.TheEUtaxonomywilladoptcriteriafortheremainingfourenvironmentalobjectivesin2022andcontinuetobedevelopedthereafter.

However,thereportisakeymilestonewhichprovidesthefirstcomprehensiveactivity-by-activitymappingandcomparisonoftheEUandChinataxonomies,includingrelevanttechnicalscreeningcriteria.Itcreatesanimportantmethodology,asdetailedinChapter3,forimprovingthecomparabilityandinteroperabilityoftaxonomiesacrossjurisdictions,inlinewiththeG20SustainableFinanceRoadmap.

PurposeoftheCGTwork

TheCGTcanbeusedtoimprovethecomparabilityandinteroperabilityoftaxonomiesaroundtheworld.Hence,intendstoprovidemoreclarityandtransparencyaboutthecommonalitiesanddifferencesbetweenapproachesandpotentiallycontributetotheanalysistolowerthetrans-boundarycostofsustainableinvestmentsandscaleupthemobilizationofsustainablecapitalinternationally.Italsoprovidesasolidmethodologyonthebasisofwhichothertaxonomiescanbecomparedinthefuture.

Itcomesatacriticalmomentwhentaxonomiesarebeingdevelopedbyagrowingnumberofcountriesandregionsaroundtheworldandthedebateindifferentinternationalforaisbecomingmoreandmoreimportantinordertoavoidunnecessaryfragmentationandconfusioninthemarket.

Tothisend,itdoesnotnecessarilymeanthattaxonomieshavetobeidenticalbutratherthattheyaredevelopedbasedoncommonsustainabilityobjectivesandprinciplesandusingacommonlanguagemakingthemmorecomparableandinteroperable.Thiscomesacrossclearlyinthehigh-levelprinciplesputforwardbytheIPSFUNDESAinputpapertotheG20.3

Forinstance,theaforementionedinputpaperpointsoutthecommonfeaturesidentifiedinexistingtaxonomiessuchas:(1)Granularandclear,(2)Publiclyavailable,and(3)Science-based.

Bettercomparabilityandinteroperabilityarecoreenablersofinternationalfinanceglobally–iftaxonomiesarecomparableandinteroperable,theycanhelptoreducetransactioncostsbyavoidingunnecessaryduplicationofverifications,byincreasingmarketconfidence,reducemarketsegmentation,andhelptofacilitatecrossbordergreencapitalflows.

ByhighlightingmajorareasofcommonalitybetweentheEUandChinataxonomies,theCGTrepresentsacrucialstepintheprocessofexploringoptionsforincreasinginteroperabilitybetweentaxonomiesoftheEUandChina,anditcouldalsobeusedasastartingpointorreferenceforotherjurisdictionsindevelopingtheirowntaxonomieswithcommonfeaturesasdescribedabove.TheCGTaimistoultimatelyhelpfacilitategreaterglobalinteroperabilityandtheflowofgreenfinance.

Potentialbenefits

.ThefindingsofthiscomparisonexercisearelimitedonlytosomefeaturesoftheEUandChinataxonomiesandhavenolegalvalue.Onthisassumption,theymayinformavarietyofactors,including:

3Ibid.

11

?Issuersofgreenbondsandothergreenfinanceproducts,andgreenbonds/assetsverifiers;

?Entitiestryingtoassessthealignmentoftheirbusinesswithlowcarboneconomyobjectives;

?Banksandfinancialinstitutionsinaligningtheiractivitieswithlowcarboneconomyobjectives;

?Researchandacademicinstitutions;

?DevelopmentfinanceinstitutionsandreportingentitiesinterestedinmarketcomparisonswiththeCommonPrinciplesforClimateMitigationFinanceTracking(2015updatedin2021)4andinternationaldefinitionsofClimateFinance;

?Jurisdictionssuchasnationalgovernmentsorregionalbodieslookingforanalyseordeveloptheirowntaxonomy;

?InternationalstandardsettingbodiesconsideringtheCGTasareferenceforworkingonothersustainablefinancestandards.

2.1.3.ContributionoftheCGTtoglobalcomparabilityandinteroperabilityofsustainablefinancestandards

Agreentaxonomyisanimportantbuildingblockofasustainablefinancialsystem.Itisatooltohelptodirectflowsofcapitaltogreen,sustainableprojects.However,enablingtheflowofcapitalintogreen,sustainableprojectsaroundtheworldrequiresinteroperabilityoftaxonomies.Ifinteroperable,taxonomiescanhelpinvestors’directcapitalacrossbordersmoreeasily,forinstancebyreducingthecostsofverifications/duediligence.Further,giventhattaxonomiescansupportothertoolssuchasbenchmarksandlabels,theinteroperabilityoftaxonomiesisconducivetocreatingbetterconsistencyacrosstherangeoftoolsinthemarket.

TheCGTisexpectedtoplayapivotalroleinincreasingcomparabilityofsustainablefinancetaxonomiesanddefinitionsofgreen,sustainableactivitiesglobally,withaviewtofutureinteroperabilityinlinewiththeG20SFWGindications.ThisisaroleitwillplaybothwithintheIPSFmembershipandbeyond.

Inparticular,theG20SFWGislookingintowaystoimproveglobalcomparabilityandinteroperabilityofapproachestoaligninvestmentstosustainabilitygoalsincludingtaxonomies.TherecentlyreleasedpaperbyIPSFandUNDESAhaveinformedtheG20SFWGworkandseekstopromotecommonprinciplestoimproveconsistencyinsustainableinvestmentapproaches5.Aspartofthiswork,theG20SFWGhasmadeanumberofrecommendationstofacilitatetheinteroperabilityacrossapproachesandtoolsforidentifying,verifyingandaligninginvestmentswithsustainabilitygoals,includingthe:

“Differentmarketscanusereferenceorcommontaxonomiesonavoluntarybasis.Suchusecanfacilitatecross-bordersustainablefinancialflowsforexamplebyreducingthecostsofverifications.Forjurisdictionsormarketsthatwanttouseataxonomy,butdonothavetheresourcestodeveloptheirowntaxonomies,theycanalsochoosetoadoptanexistingtaxonomy.Regionswithalargenumberofrelativelysmalleconomiesormarkets(e.g.,Africa,CentralAsia,andLatinAmerica)canconsiderregionalcollaborationontaxonomies,includingdevelopmentoftaxonomies,toavoidmarketsegmentationandilliquiditywhilepromotingcross-borderinvestment.”6

4MDB/IDFC,CommonPrinciples,2021(

/attachments/documents/mdb_idfc_mitigation_common_principles_en.pdf)

5Improvingcompatibilityofapproachestoidentify,verifyandaligninvestmentstosustainabilitygoals(IPSF-UNDESAinputpaperfortheG20SFWG)

(/wp-content/uploads/2021/09/G20-SFWG-DESA-and-IPSF-input-paper.pdf)

62021G20SynthesisReportofSustainableFinanceWorkingGroup,(

/wp-content/uploads/2021/11/Synth_G20_Final.pdf

)

12

IPSFhasplayedakeyroleasknowledgepartnerofthealignmenttopicintheG20SFWGthroughtheinputpaperwithUNDESA.ThedevelopmentoftheCGTisanotherdemonstrationprojectforthiseffort.

2.2.OverarchingcomparisonoftheEUandChinataxonomies

2.2.1.Historyofdevelopmentprocess

TheEuropeanUnion

InDecember2016,theEuropeanCommissionestablishedtheHigh-LevelExpertGrouponSustainableFinance(HLEG)tohelpdevelopanoverarchingandcomprehensiveEUroadmaponsustainablefinance.TheHLEGprocessculminatedinthepublicationofthereportFinancingaSustainableEuropeanEconomyinJanuary20187which,amongothers,recommended‘establishinganEUsustainabilitytaxonomy’asapriorityaction.

InMarch2018,theEuropeanCommissionadoptedtheActionPlanonFinancingSustainableGrowth8,outliningacomprehensiveEU-levelstrategytomobiliseprivatecapitaltowardssustainableinvestment,enhancetransparencyandmanagerisksofclimatechangeandenvironmentaldegradation.BasedontendetailedactionsintheActionPlan,theEuropeanCommissionproposedinMay2018,amongotherlegislativeinitiatives,tocreateanEUTaxonomyofgreen,sustainableactivities(hereafterreferredtoastheEUTaxonomy).

ThisledtotheestablishmentoftheEUTechnicalExpertGroup(EUTEG)consistingof35membersandobserversfromcivilsociety,academia,businessandthefinancesector,todevelopinteraliaalistofeconomicactivitiesandenvironmentalperformancerequirementsfortheEUTaxonomytohelptoachievetheEU’sclimategoalsandSDGs.

7

8

FinalReport2018bytheHigh-LevelExpertGrouponSustainableFinance,

(https://ec.europa.eu/info/sites/info/files/180131-sustainable-finance-final-report_en.pdf)

Seefactsheet:

https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/200108-financing-sustainable-growth-factsheet_en.pdf

13

InrespectoftheEUTaxonomyproposal,theTEGmissionwastoadvisetheCommissiononthescreeningcriteriaoneconomicactivitiestoidentifywhethertheymakeasubstantialcontributiontoclimatechangemitigationandclimatechangeadaptation.

InMarch2020,theEUTEGofficiallyreleasedseveralreports,9whichincludedtheFinalReportonTaxonomy10anditsTechnicalAnnex11.

On18June2020,theEUco-legislators(the

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