EU lawmakers back political deal on green taxonomy
The European Parliament has voted in favor of a political agreement on the EU's green taxonomy, a classification system that aims to guide investors towards environmentally sustainable economic activities. The taxonomy is seen as a key tool to support the EU's goal of becoming climate neutral by 2050 and to mobilize private capital for the green transition.
What is the green taxonomy?
The green taxonomy is a list of economic activities that are considered environmentally sustainable according to six objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
The taxonomy sets out detailed criteria and thresholds for each activity to qualify as sustainable, based on scientific evidence and advice from experts. The criteria are designed to ensure that the activities make a substantial contribution to one or more of the objectives, do not significantly harm any of the other objectives, and comply with minimum social and governance standards.
The taxonomy will help investors, companies, issuers and project promoters to identify and report on investments that are aligned with the EU's environmental objectives. It will also prevent greenwashing, the practice of marketing financial products as green or sustainable when they are not.
What are the main features of the political deal?
The political deal between the European Parliament and the Council of the EU was reached in December 2021, after months of negotiations. It was endorsed by the Parliament's plenary on 6 July 2022, with 557 votes in favor, 95 against and 68 abstentions.
The deal confirms the six environmental objectives and the "do no significant harm" principle of the taxonomy. It also introduces a new category of "enabling activities", which are activities that do not meet the sustainability criteria by themselves, but enable other activities to do so. For example, manufacturing wind turbines or installing insulation materials.
The deal also establishes a platform on sustainable finance, composed of experts from various sectors and backgrounds, to advise the European Commission on developing and updating the technical screening criteria for the taxonomy.
One of the most controversial issues in the negotiations was whether nuclear energy and fossil gas should be included in the taxonomy. The deal does not explicitly exclude or include any specific technologies, but leaves the decision to the Commission, based on scientific assessments and the advice of the platform on sustainable finance.
The deal also requires companies that are subject to the EU's non-financial reporting directive to disclose how much of their turnover and capital expenditure is aligned with the taxonomy. Financial market participants will also have to disclose the share of taxonomy-aligned investments in their portfolios or products.
What are the next steps?
The political deal still needs to be formally approved by the Council of the EU before it can enter into force. The Commission will then adopt delegated acts to specify the technical screening criteria for each activity, starting with those related to climate change mitigation and adaptation. The first set of criteria is expected to be adopted by the end of 2022 and apply from 1 January 2023. The criteria for the other four objectives will follow by the end of 2023 and apply from 1 January 2024.
The Commission will also review and update the taxonomy regularly, taking into account technological developments and scientific evidence. The platform on sustainable finance will play a key role in this process, as well as in monitoring and reporting on the implementation and impact of the taxonomy.
The taxonomy is part of a broader action plan on sustainable finance that the EU launched in 2018. The plan also includes measures such as establishing an EU green bond standard, creating an EU ecolabel for financial products, enhancing sustainability-related disclosures and integrating sustainability risks into prudential rules.
References
: [EU Taxonomy explained | European Commission](https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en)