At first glance the term appears quite abstract and intimidating.  But it is worth understanding as it represents an important tool of the EU for promoting low carbon sectors and activities, and discouraging investments in high carbon producing ones. Basically the Taxonomy is a set of rules that provide investors with a common definition of what is green and what is not so that capital can be spent on sustainable businesses.

The Taxonomy sets performance thresholds to support economic activities which:

·      Make a substantive contribution to one of six environmental objectives;

·      Do no significant harm (DNSH) to the other five objectives;

·      Meet minimum safeguards

The six environmental objectives are:

1.   Climate change mitigation

2.   Climate change adaptation

3.   The sustainable use and protection of water and marine resources

4.   The transition to a circular economy

5.   Pollution prevention and control

6.   The protection and restoration of biodiversity and ecosystems

The EU Taxonomy is not a mandatory list of economic activities for investors and they are free to invest in whatever they choose.  But is it expected that over time the Taxonomy will come to represent the list of what are the most green, sustainable activities.

As an example, solar and wind energy are classified as green, but bio-energy only qualifies as green if they comply with strict criteria.  A heated issue with the Taxonomy is whether to include nuclear and/or natural gas as sustainable energy sources.

Some further ideas to explore on EU Sustainable Finance Taxonomy:

What is the advantage to investing in companies engaged in activities that qualify for the Taxonomy?

Are there any disadvantages to investing in activities on the Taxonomy?

Is nuclear or natural gas more sustainable?

Sources:

EU Taxonomy: Final report of the Technical Expert Group on Sustainable Finance (March 2020). bit.ly/3qBWyxS

European Commission, EU taxonomy for sustainable activities:  What the EU is doing to create an EU-wide classification system for sustainable activities.  bit.ly/3qGAcey

European Commission, FAQ: What is the EU Taxonomy and how will it work in practice? bit.ly/3zfSWFN

Jennifer Rankin, “EU in row over inclusion of gas and nuclear in sustainability guidance,” The Guardian (21 Dec 2021).  bit.ly/3qw0noi

Frédéric Simon and Kira Taylor, “The Green Brief: Gas, nuclear and the EU taxonomy saga,” Euractiv (28 Oct 2021). bit.ly/3sHn7Vb

Editor’s Update (3 Jan 2022) on EU Taxonomy:

Jennifer Rankin, ‘Fury as EU moves ahead with plans to label gas and nuclear as ‘green’: Brussels faces backlash and charges of greenwashing after publishing draft proposals on New Year’s Eve,” The Guardian (3 January 2022).  bit.ly/3mUP6gt