THE European Union (EU) has agreed a taxonomy which sets criteria to decide whether an economic activity is environmentally sustainable, in a landmark ruling which complements the economic bloc’s ambitious Green Deal agreed last week which aims for full carbon neutrality and zero pollution in the region.
Lawmakers had overcome divisions over what should be classified as green, with nuclear and gas-fuelled power neither included in nor excluded from the list of eligible industries, according to the do no significant harm principle. EU governments and the European Parliament ratified the taxonomy December 18 in what represented the first time a global regulator has produced a comprehensive labelling system for what can be classified as a sustainable financial product.
The negotiations had last week been on the brink of collapse as France and a large number of eastern European countries had pushed for the full inclusion of nuclear energy in the taxonomy, but the gap was closed on Monday night [December 16] and the new rules are to be formally adopted in January and implemented next December.
Nuclear technology will not be classified as green but as a low-carbon technology that can critically help in the process of transitioning to full carbon neutrality.
In the arena of green finance which is beset with complaints about the lack of standardized definitions across industries and asset classes this represented progress indeed.
And full credit must go to negotiators for mindfulness of the challenge posed by greenwashing, whereby market players can label products as green without any form of diligence available for investors to be able to verify the veracity of that claim.
“The taxonomy for sustainable investment is probably the most important development for finance since accounting. It will be a game changer in the fight against climate change,” says lead negotiator for the Environment Committee, Sirpa Pietikainen.
“I am satisfied that we reached a balanced agreement with Council, but this is only the beginning. Greening the financial sector is a first step to make investments flow in the right direction, so it serves the transition to a carbon neutral economy.”
According to the taxonomy regulation certain environmental objectives must be considered when evaluating the sustainability of an economic activity. These include climate change mitigation and adaptation, the use and protection of water and marine resources, the contribution of an activity to the transition to a circular economy including waste prevention and the uptake of secondary raw materials and the protection and restoration of ecosystems and biodiversity.
The new regulations stipulate that any EU-listed company with over 500 employees must disclose how much of its revenue and capex derive from activities which tick the taxonomy’s boxes.
“All financial products which claim to be sustainable will have to prove it following strict and ambitious EU criteria,” says Economic Affairs Committee rapporteur Bas Eickhout.
“The compromise also includes a clear mandate for the Commission to start working on defining environmentally harmful activities at a later stage. Phasing out those activities and investments is indeed as important to achieve climate-neutrality as supporting decarbonized activities.”
Under the EU taxonomy, the green label will represent the highest standard available to investors and will apply to renewable technologies and clean energy products.
It will have profound implications for the auto industry, with the EU set to produce a grading of car companies’ sustainability credentials based on the revenues they derive from zero emission vehicles, something which will affect asset managers’ treatment of equity and debt issued by those companies.
“The taxonomy will progressively become the EU standard for investment managers and clients,” says French MEP Pascal Canfin, who heads the European Parliament’s environment committee.
Engagement with credit rating agencies is the next step for the integration and broadening of the taxonomy into the global institutional investor base.
“We are delighted that there is now full agreement on the EU taxonomy, which represents a generational shift for responsible investing in Europe and around the world,” says Nathan Fabian, rapporteur for the Taxonomy Group of the EU Technical Expert Group on Sustainable Finance and chief responsible investment officer of the Principle for Responsible Investment.
“In providing a common framework for investors, the taxonomy will achieve consistency and rigour around how environmentally sustainable investment products and activities in Europe are categorized. With global convergence in the investment sector, the taxonomy also provides a robust framework for other markets.”