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EU Taxonomy on Sustainable Finance becomes law

AUTHORS: Ben Allen – Nora Hiller

A political agreement was found for the first step of the EU Taxonomy. This represents a major achievement for the EU’s sustainable finance agenda, yet political decisions and lack of transparency endanger the scientific basis on which the strength of the Taxonomy rests.

The EU’s sustainable finance taxonomy is in principle a ground-breaking initiative that will guide financial markets towards investing in sustainability and supports closing the private investment gaps to deliver on the EU’s environmental ambitions.

On the 9th of December, the Delegated Act on climate mitigation and climate adaptation arising from the Taxonomy Regulation passed through the final stages of the political negotiations and will soon become EU Law. The act lays out the technical screening criteria – the benchmarks that define if an economic activity addresses (or in Taxonomy terms delivers a substantial contribution) the objective of climate mitigation or adaptation. For instance, the criteria would give the template to make a judgement of in what way power generation from wind supports climate mitigation, and if the investment contributes to the EU’s environmental goals. It also contains minimum safeguards that must be secured for all other four environmental objectives of the Taxonomy – the Do No Significant Harm (DNSH) criteria.

Major financial actors and businesses in the EU will soon be required to report on their alignment with the criteria of the Taxonomy Delegated Act under disclosure regulations. Rather than binding a sector to action, the Act aims at creating greater clarity on the proportion of investments that are going to support the sustainability transition, and helping to guide those wishing to make sustainable investments. By creating criteria for almost 80 climate mitigation activities and over 100 adaptation activities, the act has the potential to address the sectors responsible for more than 80% of the EU’s greenhouse gas emissions and represents a huge leap forward in guiding private finance towards sustainability.

Within a short timeframe from the entry into force of the Taxonomy Regulation (2020), and the resulting criteria, a guideline for sustainability was achieved which was impossible over decades of reforms and amendments of public policies across the same sectors, a truly remarkable achievement for all those involved. To bring together so many criteria and sectors into one space has been a hard-won battle.
Nevertheless, there have been casualties along the way, notably the political powerplays in the Council, especially as some Member States are going through political changes, such as the fallout of the German elections and the upcoming French elections next year. This has forced compromises and shifted certain criteria away from the evidence and scientific basis on which they were originally developed. This confirms the need for a strong independent voice on criteria development and review provided by expert groups, such as the Platform on Sustainable Finance, and for greater transparency in the decision-making rationale as criteria go through the political process.

The Climate Delegated Act will enter into force on the 1st of January 2022 – or, to be more festive – the eighth day of Christmas and represents the first of an ever-evolving list. Work now focusses on bringing forwards criteria for the other four environmental objectives of the Taxonomy, addressing water, biodiversity, pollution and circular economy, to complement those already in the climate delegated act, whilst expanding the types of activities that are being covered.

Regular reviews and updates of criteria are essential to keep the Taxonomy current, putting the evidence for their inclusion under the magnifying glass – for instance soon needed for the criteria for forestry and bioenergy, Importantly, there continues to be the risk of undermining the entire process through the inclusion of nuclear power and fossil gas as sustainable investments in a complementary act of the Taxonomy. Transparency, accountability and scientific evidence are key for preventing greenwashing.

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