Fashion in Change, Part 2: Green taxonomy creates change around finance and climate
The taxonomy regulation was introduced in the EU in July 2020 and establishes a list of environmentally sustainable economic activities. What does this mean for the textile and fashion industry?
“In short, the EU taxonomy will ensure that all companies operating in the EU are transparent and that the figures they report determine how they are taxed and what price they have to pay for access to capital. Since the fashion and textile industries have not gone through constant regulation in the last 50 years, the taxonomy will lead to a number of changes over a compressed period of time which in the worst case will lead to the failure of several brands. Initially, most companies will have challenges reporting accurate data because the industry does not have access to detailed and accurate data across a long and complex value chain.
How important is the work on a green taxonomy in the EU to increase sustainable investment and in what way?
“State financial institutions, banks and other financial institutions have seen that financial risk is the same as climate risk. This is where EU taxonomy and green finance meet. Just look at the insurance industry, which constantly has to pay more for the climate-related damages that occur worldwide as a result of more unpredictable and severe weather changes such as wildfires, floods and landslides.
“In order to measure, report and analyse climate impacts, we need a standard framework for everyone to apply. The EU Taxonomy is a classification system in line with the Sustainability-Related Disclosures to be Disclosed in the Financial Sector Regulation (SFDR), which requires companies to disclose the extent to which their activities are harmful under ESG - Environmental Sustainable Governance. The financial industry, in turn, uses company accounts to determine the cost of its financial affairs along the lines that financial risk is the same as climate risk.
“The financial industry's access to money for further lending is determined by the extent to which their investments take place in greener and more climate-friendly conditions in relation to the structure of the taxonomy. Therefore, if a company continues to operate on an anti-climate track, the price of loans can become so high that it is not profitable to continue, and a transition from brown to green will be forced. By extension, the company will eventually cease to exist because the bank does not receive money from its central bank if it continues to finance activities that threaten nature and the climate. Green Taxonomy will also affect taxes and fees.
How does the Fashion Innovation Center work on this?
“The Fashion Innovation Center works closely with the EU, the financial industry and other industries to understand how the taxonomy can be translated into practical measures that will enable the fashion and textile industries to make the necessary shift. We are working on finding solutions that can be funded with green capital because they can be related to the structure and framework of taxonomy.
How can one proceed according to the taxonomy?
“Much of the current and future EU legislation is linked to the taxonomy and will use the statements of companies in relation to taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) to determine which CO2 taxes are payable when importing garments into the EU, and what tax is due when the garment enters the waste stream.
“Several players also argue that the waste tax must be related to how long a garment has been in use so that short-lived and little-used garments are taxed higher. Such activity will be possible through the upcoming Digital Product Pass (DPP), which will explain what a garment consists of, carbon footprint and water consumption, when and where it is produced, and more. The final structure of the DPP has not been decided at the time of writing. Without a standard framework, it will be difficult to implement profound changes in the fashion and textile industries.
More articles: In our mini-series about changes in the textile and fashion industry, there will be a total of three articles in which Kurt Svegård from the Fashion Innovation Center gives his views. IN the first part he spoke about important changes for a sustainable industry and the third is about the importance of new business models.