The European Commission has launched the EU Taxonomy for Sustainable Activities, a classification system for establishing what counts as a sustainable investment, which will influence investment strategies in both public and private sectors. Indeed, the Taxonomy will be important for public authorities at all levels, as it aims to direct public funds into sustainable activities, while others will become ineligible for public funds.
In the framework of the European Green Deal, the Commission has recognised that companies, investors and policy-makers need greater confidence in which activities are truly environmentally sustainable. The current lack of a common methodology and shared definitions is a major barrier to sustainable finance, which the taxonomy aims to overcome.
The Regulation establishing the framework for the taxonomy was finalised in 2020, establishing environmental objectives of climate change adaptation and mitigation, sustainable use of water, transition to a circular economy, pollution prevention and protection of biodiversity and ecosystems. However, the actual list of sustainable activities is being defined in complimentary delegated acts (CGAs). The first on climate change adaptation and mitigation was adopted in 2021, and the second covering all remaining objectives was published in February 2022, causing a significant level of controversy.
To inform the taxonomy, the Commission established advisory bodies, a Technical Expert Group on sustainable finance and the Platform on Sustainable Finance, and has worked to create a clear methodology and criteria for what counts as a sustainable investment. Against the advice of the Expert Group and Platform, the Commission has published a draft CGA including both nuclear energy and fossil gas as sustainable, causing much disapproval from civil society and political groups.
The Council of the European Union and the European Parliament will scrutinise the taxonomy CGA and issue their decisions by May 2022. While the Council seems likely to approve the definitions, the European Parliament’s position remains less clear. Both institutions will need to accept the act for it to enter into force, adding to pressure for the two to reach a compromise in the coming months.
To find out more about the Taxonomy visit the European Commission’s webpage, the page of the Platform on Sustainable Finance, and the EU Taxonomy Compass, which has been established to make the taxonomy accessible to users.