The European Union (EU) needs an extra €180bn a year to meet its energy and climate goals by 2030. The introduction of a common language is a crucial step towards making this a reality.

European Commission (EC) Policy Officer Maarten Vleeschhouwer is part of efforts to implement a new taxonomy as part of the EC action plan on sustainable finance. Vleeschhouwer explained the significance of this development at the ‘Sustainability Storm’ seminar in Woerden Castle on 4 July.

The EU has committed to three ambitious climate and energy targets for 2030 in line with the UN 2030 Agenda, the Sustainable Development Goals (SDGs) and the Paris Agreement. Public supporting schemes alone will not be enough to meet these goals, highlighting the need for private sector involvement. Consequently, the EU has designed the action plan to provide a framework for investing in more sustainable projects and activities.

The taxonomy is an essential component of this plan as it will help investors to better understand how their capital is supporting commitments to the Paris Agreement and SDGs. The taxonomy currently describes sixty-seven economic activities that are considered environmentally sustainable for investment purposes.

The EU policy has three main objectives: reorienting capital flows towards sustainable investment; mainstreaming the addition of sustainability in risk management assessments; and fostering transparency and long-termism. The taxonomy is just one vital step the EU is taking to reach these objectives. It is also working on the development of sustainable benchmarks and the introduction of labels and standards for financial retail products.

Vleeschhouwer descibes the taxonomy as a light-touch requirement. Investors who claim to invest sustainably have to mention whether or not they use the taxonomy. If they do, they have to explain how they use it.

To be included in the taxonomy, economic activities have to comply with four conditions. The first two concern the EU’s environmental objectives. The activity must both substantially contribute to at least one of the six environmental objectives, while also demonstrating it does no significant harm to any of the others. The six objectives are:  

 

 

Lastly, the activity must comply with minimum safeguards, and quantitative or qualitative technical screening criteria.

The aim of this taxonomy is not to prescribe where investors should put their money. As a result, the taxonomy doesn’t say anything about the activities that aren’t listed, nor does it tell investors anything about the financial strength of companies. It is about ensuring investors are equipped with the data required to make an informed decision.

The taxonomy distinguishes between three groups of activities. The first group will include activities with very low levels of carbon emissions. This represents quite a stable group, for example, windmills and solar panels.

The second group consists of activites which contribute to a transition to a zero net emissions economy in 2050 or shortly thereafter, but are not currently close to a net zero carbon emission level. For these activities, thresholds will be tightened in the coming years. 

The third group consists of activities that enable emission reductions in either of the two previous categories. Possible revisions of the criteria for this last group depend on technical developments.

Greater investment is urgently needed to accelerate the transition to a low-carbon economy. This taxonomy represents an ambitious undertaking that will ultimately drive investment in sustainable projects and activities. A common language for financial markets will bring clarity to proceedings and help companies raise green finance.