The European Central Bank (ECB) has called for the development of a ‘brown’ taxonomy to complement the EU’s ‘green’ taxonomy of environmentally sustainable economic activities.
A brown taxonomy, also called a dirty taxonomy, is a defined classification and list of high-emission economic activities. According to the ECB, a taxonomy of such activities would help EU financial institutions to assess and manage climate transition risks and would improve consistency in climate-related disclosures and reporting.
In the words of the ECB, it will provide “an immediate anchor for applying potential risk differentials between different types of assets to assess if a specific prudential treatment would be justified.”
However, the bank also warned that “climate-related and environmental risks are not binary” and that banks and supervisors must ultimately manage climate risk across the entire spectrum of asset classes, including what it termed “green”, “brown” or “different shades of brown” exposures. This would suggest a continued ECB willingness to hold high-emission assets in its monetary policy portfolio.
The ECB’s call for a dirty taxonomy comes as part of the bank’s comprehensive submission to the European Commission’s public consultation on the Renewed Sustainable Finance Strategy and revision of the Non-Financial Reporting Directive. In its contribution, the ECB also called for improved quality of sustainability and climate-related information, for the development of an EU green bond standard, and for integration of ESG factors into credit agency ratings.
Climate campaigners and investor groups have urged the ECB to push for a dirty taxonomy to facilitate the screening and exclusion of coal and other fossil fuel-related assets from sustainable investment portfolios.
This page was last updated April 23, 2021
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