Summary of the EU Taxonomy that was Launched in 2020
The European Commission established a Technical Expert Group (TEG) on sustainable finance midway through 2018, tasked to advise with a range of policy reforms. Their aim is to help facilitate Europe’s move to net-zero carbon emissions by 2050, as well as combating climate change in the long-term.
In their own words; the EU Taxonomy “is a tool to help investors, companies, issuers and project promoters navigate the transition to a low-carbon, resilient and resource-efficient economy.” It should also help the market to have greater clarity when implementing sustainable measures.
Updated in March 2020, there’s a 600-page document, while you can read through a 67-page summary packed with information and recommendations that was produced with help from over 200 experts.
They’ve set a list of performance thresholds, “helping companies, project promoters and issuers access green financing to improve their environmental performance, as well as helping to identify which activities are already environmentally friendly.”
Here’s a summary of the summary, discussing what it means in terms of sustainable finance, and how to implement changes if you’re affected.
The European green deal and performance thresholds
With targets of net-zero carbon by 2050 and halving all emissions by 2030, the European Green Deal was first presented in December 2019. They proposed a ‘Climate Law’ to achieve their aims, leading to an updated report in March 2020.
The EU Taxonomy has a list of common rules to define what counts as a green investment, to ensure that money is being spent on sustainable activities. They also want to stamp out the practice of ‘greenwashing’ in the financial sector, which companies use to trick the public into thinking that an organization's products, aims or policies are environmentally friendly.
For example, a company might switch to a more cost-effective method that just so happens to be greener, or misrepresent their emissions data, while reaping the PR benefits of the decision.
The TEG takes the view that; “the trajectory of today’s economy is not consistent with the EU’s environmental goals. Few sectors of the economy are operating at a net-zero level, and emissions are not reducing fast enough. Few communities and businesses are systematically preparing for a changing climate.”
The following trio of thresholds have been set to ensure that activities are consistent with environmental objectives;
Make a substantive contribution to one of six environmental objectives;
Climate change mitigation
Climate change adaptation
Sustainable and protection of water and marine resources
Transition to a circular economy
Pollution prevention and control
Protection and restoration of biodiversity and ecosystems
Do no significant harm (DNSH) to the other five, where relevant
Meet minimum safeguards (e.g., OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights)
Key takeaways from the EU Taxonomy
The EU Taxonomy is an extensive document which hopes to build towards improved environmental performance. Here are some of the key points to consider:
The recommendations relate to the design of the EU Taxonomy, and include extensive implementation guidance for businesses that fall under their sphere of influence
While they focus on sustainable finance, their scope is much larger than banking and other financial services in the long-term
To achieve targets set in the European Green Deal, they’re using the full force of the law at their disposal
They note that; “financial market participants will be required to complete their first set of disclosures against the Taxonomy, covering activities that substantially contribute to climate change mitigation and/or adaptation, by the 31st of December, 2021”
The report states that “the final Taxonomy Regulation introduces a new disclosure requirement for companies already required to provide a nonfinancial statement under the Non-Financial Reporting Directive”
The TEG has added criteria for 67 economic activities which could contribute substantially to climate change mitigation
Implementing EU Taxonomy Goals
The TEG acknowledges that the strict timeline presents challenges in terms of implementation, while they need to work on technical screening criteria for financial market participants.
The first phase of technical screening looks at climate change mitigation or adaptation, and will be adopted by the end of 2020. The second round of technical screening criteria is focused on economic activities substantially contributing to a further four environmental objectives, which are set to be adopted by the end of 2021. They aim to be put into application by 2022.
For further help with implementing TEG processes, the final report includes a step-by-step example of how to assess a company or investment portfolio, which can be found on page 49. You can also consult the 67 proposed economic activities for ways in which to improve compliance with the Green Deal.
In terms of importance, they’re clear about the most important aspects to consider;
“The Guidelines provide a comprehensive list of recommendations on how companies should act. The TEG encourages companies to implement all recommendations to the greatest extent possible. For the purposes of the implementation of the Taxonomy, the TEG considers that both companies and investors should centre compliance on human rights, labour rights, and combating bribery, bribe solicitation and extortion.”
The Covid-19 virus outbreak could also lead to accelerated plans togreen the economy in the European Union, as they remain committed to stemming the ongoing climate crisis. Given the shock felt by financial institutions and the global stock market, they could be uniquely placed in terms of the power of their hand. They’ll need to avoid the mistakes of 2008, where the majority of stimulus packages had no environmental measures in place. Rather than weakening EU Taxonomy, the virus could help to enact further sustainable change across the continent.
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