The EU taxonomy for sustainable activities (a green taxonomy) is a classification system established to clarify which economic activities are environmentally sustainable, in the context of the European Green Deal. The aim of the taxonomy is to prevent greenwashing and to help investors make informed sustainable investment decisions. The Taxonomy covers activities contributing to six environmental objectives: climate change mitigation, climate change adaptation, the transition to a circular economy, pollution prevention and control, sustainable use and protection of water and marine resources, and protection and restoration of biodiversity and ecosystems. The Taxonomy came into force in July 2020. The UK is working on its own separate taxonomy.
General overview The European Union (EU) Taxonomy was implemented as part of the European Green Deal initiatives. The EU launched the European Green Deal in line with the Paris Agreement goals, setting out the objectives to achieve a carbon neutral economy by 2050. The European Green Deal is based on the European Action Plan with the aim of strengthening sustainable growth funds, with the goal of reorienting capital flows towards sustainable investment. Sustainable finance is one of the main pillars of the EU Green Deal and requires the private sector and investors in general to divert their financing towards a green transition. Therefore, to meet the objectives of the European Green Deal, the European Commission (EC) diverges towards investments having sustainable projects and activities. This Action plan then led to the EU taxonomy.
The EU taxonomy is a green classification scheme for specific economic activities to evaluate their environmental performance.Corinne Raux and Séverin Fischer, "Testing the application of the EU Taxonomy to core banking products: High level recommendations", January 2021. Pdf. P.19. Retrieved from https://www.ebf.eu/wp-content/uploads/2021/01/Testing-the-application-of-the-EU-Taxonomy-to-core-banking-products-EBF-UNEPFI-report-January-2021.pdf In essence, the EU Taxonomy is a system which determines environmentally sustainable activities and provides ways through which a company can calculate its sustainability turnover.Elia Group (2021). EU Taxonomy Case Study. Implementation process, results and recommendations P.7 The EU Taxonomy Regulation was officially published by the EU on 22 June 2020, after its endorsement by the European Parliament on 18 June 2020 and took effect on 12 July 2020. As of now, the EU taxonomy is considered one of the main pace setters which aids the financial system redirect capital towards a low carbon economy conforming to the Paris Agreement. Upon findings by the Technical Expert Group (TEG), the EU taxonomy has undergone various testing in both private and public sectors which includes the European Investment Bank and BNP Paribas asset management.Sweatman P., Hessenius M. "Applying the EU Taxonomy: Lessons from the Front Line", Paper jointly prepared by Climate Strategy and Climate & Company P.4
Preparatory work The preparatory work started in 2018, when the Commission set up a Technical Expert Group on Sustainable Finance, to assist in developing the EU Taxonomy, with the OECD as an observer. In the case of Taxonomy, the main task of the TEG was to develop technical screening criteria that would be used to determine whether an activity is environmentally sustainable. A first report was published by TEG at the end of 2018. This introduced the first criteria for activities contributing to climate change mitigation, one of the six environmental objectives of the Taxonomy, and was accompanied by a call for feedback regarding the proposed criteria on climate change mitigation and on the usability of the taxonomy. The final report on EU Taxonomy was published by the TEG in March 2020, containing the responses to the call for feedback, recommendations to the commission on taxonomy design, a practical guide for taxonomy users on how to make disclosures, and recommendations to the Platform on Sustainable Finance, which had not yet been established at the time of the publication of the report. The TEG final report was accompanied by a technical annex, which contained an updated methodology for assessing the "substantial contribution" of an economic activity to climate change mitigation, updated technical screening criteria, and new criteria regarding activities whose inclusion in the taxonomy may be taken into account in the future. The TEG mandate, which was originally supposed to end in June 2019, was extended until September 2020, due to the high volume of feedbacks received after the publication of the first report. The TEG continued to operate with advisory functions after the publication of the final technical report, waiting for the Platform on Sustainable Finance to be operational.
Objectives Despite its potential to providing a sustainable finance to its proponents, the EU Taxonomy remains a voluntary action. It is made available for companies and investors who desire to ameliorate their climate and environmental stakes, to use this as an adaptable framework. For those who wish to rely on the EU taxonomy, there is a provision of attainable and consistent objectives which provides a common understanding of what green economic activities are and therefore part of the EU environmental goals. A Technical Expert Group was assigned in July 2018 to draft the first version of technical assessment criteria, make certain that the said criteria are in accordance with the EU's climate protection goals. this led to the submission of the first proposal in for the EU Taxonomy in March 2020. This identified six environmental objectives, which an economic activity must adhere to, to be included in the EU Taxonomy. The 6 EU environmental objectives laid by the Taxonomy Regulation are: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
Requirements For an economic activity be certified as being environmentally sustainable in keeping with respect to the Taxonomy, substantial contribution must be made to at least one of the aforementioned objectives and simultaneously have no significant detrimental impact on the other five. The principle in accordance with this is called 'Do No Significant Harm' (DNSH). Aside the 6 environmental objectives, the EU taxonomy also set forth four (4) requirements to be met by an economic activity in order to be taxonomy oriented:
making a substantial contribution to at least one environmental objective. doing no significant harm to any other environmental objective. complying with minimum social safeguards. complying with the technical screening criteria.
The main actors involved in the lawmaking process The main actors involved in the legislative process aimed at setting up the Taxonomy are, at different stages and to different extent:
the European Commission, the Technical Expert Group on sustainable finance (TEG), the Member States Expert Group on sustainable finance (MSEG), the Platform on Sustainable Finance, the European Parliament and the Council.
The TEG was composed of 35 members of different nature, ranging from business lobbies to environmental organisations. It played the main role at the preparatory stage, when was tasked with developing recommendations to the Commission regarding both the overall structure of the Taxonomy and the technical screening criteria. The Commission, based on TEG's recommendations, drafted the proposal of the Taxonomy Regulation, and the proposal was approved by the EP and the Council in accordance with the ordinary legislative procedure, which allows both the institutions to propose amendments before formal approval. Once the Taxonomy Regulation was approved, the Commission proposed three different Delegated Acts. Before proposing the DAs, the Commission was required by the Regulation to consult with the MSEG and the PSF. The former is composed of Member States’ authorities, which nominate two representatives each, while the composition of the latter is more similar to that of the TEG, with an heterogeneous mix of 57 members representing among others, business lobbies and environmental organisations. With specific regard to the Complementary Climate Delegated Act which included nuclear and gas in the taxonomy, during the consultations the PSF gave a negative feedback, while different positions have been expressed within the MSEG by different Member States. The aim of the Delegated Acts (DA) in the context of the EU Taxonomy is to set technical measures, such as the technical screening criteria which will be used to determine if certain activities are taxonomy-aligned. The choice of the DAs implies that the European Parliament and the Council cannot propose amendments, and their only possibility is to veto it as a whole. Therefore, both institutions are only involved at a later stage with no powers in shaping the content of the DAs, which is largely determined by the Commission and the expert groups.
Criticism In addition to the concerns raised on the democratic legitimacy of the delegated acts in general, also with specific regard to the taxonomy this mechanism and the lawmaking process have been subject to criticism by some. First, according to article 290 of the Treaty on the Functioning of the European Union (TFEU), the EP and the Council can empower the Commission to adopt DAs only to "supplement or amend certain non-essential elements of the legislative act", while the content of the DAs is argued to be an essential part of the taxonomy. The Austrian government complained about, among other aspects, the insufficient time given to the MSEG and the PSF to consult and the lack of public consultations and of an impact assessment on the inclusion of gas and nuclear in the taxonomy.Austrian Government (2022). Taxonomy Regulation Complementary Delegated Act (DDA) amending Delegated Regulations (EU) 2021/2139 and (EU) 2021/2178. Comments by Austria Similar concerns were expressed by the EP, which also complained for not having been given enough time to scrutinize the third DA.
Delegated Acts The Taxonomy Regulation expressly empowers the Commission to adopt delegated acts, after consulting the Platform on Sustainable Finance and the Member States Expert Group on Sustainable Finance. Since the entry into force of the Regulation, the Commission has adopted four delegated acts.
Climate Delegated Act The Climate Delegated Act, was adopted in June 2021 and published on the Official Journal in December of the same year. It establishes technical screening criteria to determine whether an economic activity substantially contributes to climate change adaptation and climate change mitigation. Despite the significant political debate on the possible inclusion of nuclear power and natural gas as green investments, neither of them is labelled as green asset in the first delegated act. In its preamble is stated that for nuclear energy the assessment is still ongoing, and natural gas will be included in a future delegated act if it fulfilled the requirements to be considered a transitional activity.
Disclosures Delegated Act