The Green Taxonomy of the European Union
The EU Green Taxonomy is a system for classifying economic activities aimed at identifying those that are environmentally sustainable. It was designed to guide and mobilize private investments towards sectors and initiatives that support the EU’s climate and environmental objectives. This classification focuses on six key environmental objectives:
- Mitigation of climate change
- Adaptation to climate change
- Sustainable use and protection of aquatic and marine resources
- Transition to a circular economy
- Prevention and control of pollution
- Protection and restoration of biodiversity and ecosystems
Establishment of the Green Taxonomy
The European Commission tasked a group of independent experts with developing criteria to assess whether an economic activity complies with the Green Taxonomy. These criteria determine whether an activity significantly contributes to at least one of the six environmental objectives, while also respecting minimum standards for human rights and labor rights.
In June 2020, Members of the European Parliament and EU Member States adopted the taxonomy regulation, defining the criteria for inclusion in this classification. In January 2022, the first part of the Green Taxonomy, focusing on climate change mitigation and adaptation, came into effect, covering over 70 activities in key sectors such as energy, transport, and construction.
Inclusion of Gas and Nuclear in the Taxonomy
Addressing the challenges of energy transition, the European Commission proposed in December 2021 to include gas and nuclear as “transitional” activities in the Green Taxonomy. This proposal is based on the role of these energy sources in the transition to long-term climate goals, while requiring strict guarantees regarding safety and waste management.
Implementation and Implications
Implementing the Green Taxonomy involves a series of steps, including consultation with EU Member States, the European Parliament, and the Council. Companies and asset managers are required to disclose the extent to which their activities and investments align with the Green Taxonomy.
The Green Taxonomy also integrates with other EU sustainable finance initiatives, such as the European SFDR regulation, aimed at enhancing disclosure of ESG-related information in financial products. Ultimately, this will enable investors to make more informed decisions and promote a transition to a greener economy.
The Future of the European Green Taxonomy: Challenges and Perspectives
The European Green Taxonomy, the first building block of the EU’s sustainable finance plan (known as the European Action Plan for Sustainable Finance), represents a significant step forward in combating greenwashing and promoting sustainable investments. However, its effectiveness in financing the transition to a low-carbon economy remains to be demonstrated.
In a recent report, the EY firm examined how 320 European companies adopted disclosure practices after the second year of implementing the taxonomy, highlighting potential necessary improvements. The results show that the average alignment of Key Performance Indicators (KPIs) is limited to less than 15%, with significant disparities between eligibility and alignment.
A thorough analysis of these companies’ taxonomy disclosures reveals that only a fraction of their activities are eligible and aligned with climate goals. On average, the share of revenue eligible for climate goals is 25%, with an average alignment of only 8%. These figures vary considerably across sectors, reflecting the challenges companies face in implementing the taxonomy.
Companies are proportionally investing more in sustainable activities, with an average share of investments eligible for climate goals at 36%. However, the overall alignment rate remains low, at only 15%, indicating the need for increased efforts to steer investments towards more sustainable activities.
The challenges associated with implementing the taxonomy are diverse, including understanding criteria, collecting data and technical information, and evaluating compliance with criteria for substantial contribution and prevention of significant environmental damage. Despite efforts by the European Commission to clarify, uncertainties persist, making it difficult to assess companies’ alignment.
Despite these challenges, the green taxonomy offers opportunities beyond compliance, including fostering convergence of financial and extra-financial reporting practices, facilitating access to more advantageous financing options, and enhancing the image and reputation of companies committed to ecological transition.
As regulations continue to evolve, it is essential for companies to remain transparent in their methodological and interpretative choices, or face sanctions from national and European regulators. Ultimately, the future of the green taxonomy will depend on companies’ ability to overcome current challenges and seize the opportunities it offers for a successful transition to a greener and more sustainable economy.
Conclusion
In summary, the EU Green Taxonomy marks a major advance towards sustainable economic practices and combating climate change. Despite current challenges such as criteria interpretation and data collection, it offers substantial opportunities, including strengthening stakeholder confidence, facilitating access to financing, and improving companies’ reputation. As regulations and technology evolve, it is important to remain attentive to the perspectives of the Green Taxonomy, highlighting the need for companies to adapt their practices for a successful transition to a greener and more sustainable economy.