Written by Lucas-Balla Danfaga, Marie Tritz, Hugo Vinet, Manon Duchatel, Charles Deguimp and Patricio Centeno
21.07.21
This article aims to give a short introduction to what the EU Taxonomy Regulation is and to explain its major role in the European Union (EU)’s Green Deal. We discuss how it intends to shift the sectors in which investments are made and combat greenwashing as well as pointing out important controversies around its drafting.
Have you heard of ‘EU Taxonomy’ before but never quite had a chance to explore its meaning? Let’s dive into it!
The EU’s Green Deal legislation launched in 2019 and is meant to transform the polluting and fossil-dependent european market to a circular and decarbonized economy by 2050. To get to climate neutrality, the EU estimates that at least 1 trillion euros (via the European Green Deal Investment Plan) need to be mobilised to support sustainable investment in the next decade which will come from the EU budget but also from public and private investors.
To direct investments in the right direction, the EU needs to establish a clear definition of what is “green” and what can be considered as a sustainable activity. That’s where the EU Taxonomy regulation comes in.
In 2020, the European Commission adopted the Action Plan on Financing Sustainable Growth in order to give a common classification system for sustainable economic activities which resulted in the EU Taxonomy. The idea is to provide a system that allows investors and companies to invest in the development of sustainable economic activities and plan their transition, as well as to protect investors from greenwashing.
The EU Taxonomy regulation establishes a list of environmentally sustainable economic activities such as activities that produce low-CO2 emissions. It considers that an “activity” is defined as sustainable when it produces under 100g of CO2/kwh. The use of coal is also determined as disqualifying factors for a company to be considered ’taxonomy-friendly’.
Entered in force in July 2020, the EU Taxonomy Regulation will obligate companies from 2022 to report on how and to what extent their activities are aligned with the provided “environmentally sustainable” definition. This text establishes the framework for Taxonomy in the EU, and sets up four conditions that an economic activity has to meet in order to qualify as environmentally sustainable.
An economic activity is environmentally sustainable if:
- It makes a “substantial contribution” to at least one of the six following specified environmental objectives (also known as the 6 EU Taxonomy objectives) :
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems.
It does “no significant harm” to any of those six environmental objectives.
- It avoids violation of minimum ’social safeguards’: it should respect principles written in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work, and in the International Bill of Human Rights.
- It complies with “Technical Screening Criteria” (TSC) which will be developed using delegated legislation in due course. TSC permits to explain in detail what it means for an economic activity to contribute to an environmental objective.
The influence of lobbies and member states
In order for the Green Deal to keep its credibility, the EU Taxonomy is meant to be science-based, but intense political negotiations and strong influence from lobbies have challenged this ambition multiple times.
Published in November 2020, the first draft of the EU Taxonomy was postponed in January 2021 as 10 EU States vetoed because gas was not considered a transitional technology. Four months later than originally planned, the European Commission finally published in April the first section of the “sustainable finance taxonomy” which dealt with the less controversial technologies such as renewable energies, but left out agriculture as well as fossil gas and nuclear energy which some countries want to see labeled as “transition technologies”. According to WWF, it was a political necessity “because of fossil fuel lobbies’ enormous pressure over the Commission to greenwash their activities”.
A separate decision from member states and the parliament will be taken later this year.
Yet many NGOs, including Greenpeace, denounced this a “missed opportunity to use the taxonomy to secure truly green investments” and have also been critical over the criteria on bioenergy and forestry which would encourage “financing for practically any tree cutting and burning against the advice of scientists and experts”. According to them, the Commission gave in to pressures from Sweden and Finland, countries largely dependent on tree cutting for energy.
Moreover, the decision taken by Europe to not to use the taxonomy as a guide for green recovery spending has already done some reputational damage according to the climate change Think Tank E3G.
Summing things up
While the EU Taxonomy seems great on paper, a lot of work and stubbornness from policy-makers is needed in order for it to become a concrete tool serving its newborn purpose.
The Commission’s strategy is to publish the Taxonomy through scheduled delegated acts with the advice of the Platform of Sustainable Finance. Currently, delegated acts for the two first objectives (climate change action and climate change mitigation) were adopted in April 2021, the other four are expected to be adopted by the end of 2021 and will be applicable from 2023 onwards.
The essence of the Taxonomy is avant-garde and the involvement with a group of experts balances the heavy and strong lobbying of polluters, fossil fuels producers, and not-very-friendly financial players. Recent events and engagements with what seem to be ‘anti-sustainable’ firms as consultants (i.e. BlackRock) raise questions around the commitment of the EU towards sustainability and what priorities are truly being assessed.
To read more:
If you found interest in the concept of taxonomy after reading this article, or simply want to know more about sustainable finance in the EU, you can get more information:
- By reading this presentation on EU Taxonomy by the European Commission.
- Article of NGO Change Finance: Change Finance on EU Taxonomy; Change Finance on BlackRock’s involvement
