EU “taxonomy”: measures in clean transition and sustainability

One of the EU’s main present objectives is to reach climate neutrality in the member states; hence, appropriate and complex political and legal means shall be taken by national governance in order to decouple from external use of fossil fuels and reduce pollution in the European accelerated “clean transition”. Taxonomy, as a new EU “tool” is forcing all undertakings to balance the proportion of environmentally-sensible sustainable economic activities with the corporate interests, lending and investments.

The “taxonomy’s” general idea has been to create an EU-wide classification system for sustainable socio-economic activities in the member states. In order to meet the EU’s climate and energy targets for 2030 and reach the objectives of the European green deal, it is vital for the member states’ governance to direct investments towards sustainable projects and activities. During the post-pandemic period, most states have already redirected priorities and investment towards sustainable projects in order recover national economies, businesses and societies, and make the socio-economic growth resilient. Multiple global uncertainties and Russia-Ukraine military conflict have added additional complexes and urgency to the Commission’s actions.

The EU institutions (particularly, the European Commission) provided the member states with the necessary support and advise concerning common approaches to sustainability in general and the needed financial means, in particular. One of the “instruments” in the creation of a common EU-wide classification system for sustainable economic activities is the EU “taxonomy”.

Taxonomy: concept and application
In natural science and biology, taxation is a classification system for “naming and organising” into groups some natural objects, e.g. plants and animals with similar qualities. However, taxonomy is used in modern social sciences, for example in economics (distribution, production volumes, marketing, etc.), ecology and agronomy, fisheries, forestry and harvesting, as well as in manufacturing and processing, politics and legislation, etc.
See: https://dictionary.cambridge.org/dictionary/english/taxonomy

The EU institutions started to use the term in a slightly different connotation, i.e. related both to taxation issues and sustainability. Thus, for example, the EU’s taxonomy classification in the eco-sense and digital solution used six environmental objectives: – assessment of substantial contribution criteria, – “do-no-significant-harm”, DNSH-criteria, – minimum safeguard assessment; – summarizing, archiving and communication features; – training, workshops and advisory; and – assisting in verification.
Reference to the “ECOBIO-Manager” website: https://ecobiomanager.com/taxonomy-classification-and-reporting/?utm_term=taxonomy&utm_source=adwords&utm

Therefore, the EU taxonomy primarily aims to guide public and private investment to socio-economic activities that are needed to achieve European climate neutrality. But the “taxonomy’s classification” in the EU-sense does not determine what kind of technology a EU member state would use in defining energy policy and infrastructure: it is directed at “stepping-up the green transition” by including most optimal solutions in national governance to reach EU climate and sustainable goals.
Taking into account modern science-technology-innovation progress, the EU underlines the role of public-private investment in various energy resources (including nuclear) in speeding-up the transition; gas and nuclear activities shell be in line with the EU’s climate and environmental objectives to facilitate the states’ progress in reducing polluting activities in such spheres as coal generation, increased own gas and oil production towards climate-neutral future based on renewable energy sources.
Main reference to: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en

The EU taxonomy regulation was published in the Official Journal of the European Union in June and entered into force in July 2020. It established the basis for the EU taxonomy by setting out the following conditions that a national economic activity has to meet in order to qualify as environmentally sustainable: = climate change mitigation and 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.
Reference to: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en

Taxonomy’s action plan
The Commission has elaborated the EU “taxonomy compass” to specify an “ecological and climate component” in the complex taxonomy’s approach coped with the EU’s climate objectives, such as climate change mitigation and adaptation measures.
More in: https://ec.europa.eu/sustainable-finance-taxonomy/.

Hence, the Commission –through a “common language in defining” sustainable growth – developed an action plan to finance such sustainable growth in the member states, so-called “sustainable finances’ strategies.
The plan included ten key actions divided into three categories:
= First category is aimed at reorienting capital flows towards more sustainable national and the EU-wide economies with the following five actions: 1. Establishing a clear and detailed EU taxonomy, a classification system for sustainable activities with the following environmental objectives: – sustainable use and protection of water and marine resources, – circular economy, – pollution prevention, – control, protection and restoration of biodiversity and ecosystems. 2. Creating an EU green bond standard for green financial products and eco-labels for retail investment products. 3. Fostering investment in sustainable projects. 4. Incorporating sustainability in financial advice. 5. Creating a new category of sustainability benchmarks comprising low-carbon and positive carbon impact benchmarks; these benchmarks will provide investors with better information on the carbon footprint of their investments.
= Second category is mainstreaming sustainability into risk management with the following actions: a) better integrating sustainability in credit-rating agencies and market research; b) clarifying asset managers’ and institutional investors’ duties regarding sustainability, and c) introducing a “green supporting factor” in the EU prudential rules for banks and insurance companies.
= Third category -called transparency and long-term strategies- includes the following actions: a) strengthening sustainability disclosure and accounting rule-making, and b) fostering sustainable corporate governance and attenuating short-term aspects in capital markets.
More on action plan on financing sustainable growth in: https://ec.europa.eu/info/publications/sustainable-finance-renewed-strategy_en

European “green deal” and taxonomy
There are very close connections between the EU-states’ “green deal” and taxonomy’s concept; the European green deal is a EU-wide growth strategy that aims –basically – to improve citizens’ well-being and health while making Europe climate-neutral by 2050, as well as protect, conserve and enhance the EU’s natural capital and biodiversity.
Thus, the EU taxonomy and the “green deal” are both for improving the use of financial resources (as well as taxation, as part of “taxonomy) in implementing sustainable political economies in the member states. Vital key in making Europe climate neutral by 2050 is enabling private and public developers to re-orient investments towards more sustainable technologies and businesses.
The “taxonomy”, in this regard, can be regarded as a science-based “transparency tool” for companies and investors in creating a common approach and understanding in developing such spheres and sectors of socio-economic activities that would have a substantial positive impact on the European and global climate and quality of environment. It also introduces disclosure obligations on companies and financial market participants.
While the EU has common climate and environmental targets, the optimal national energy mix is every state’s prerogative, it varies from one state to another; some are still heavily reliant on imported fossil fuels and high carbon-emitting coal. The “taxonomy” is going to assist states in mobilizing public-private investments towards EU’s climate objectives and covering national energy sources’ activities that aimed to alter national policies in the right directions.
See” Commission press release on EU’s political agreement on taxonomy issues (2 February 2022) in: https://ec.europa.eu/commission/presscorner/detail/en/IP_22_711

Complementary Delegated Acts: the legal means
Two legal instruments are closely connected to the “taxonomy”: the REPowerEU Plan and the Complementary Delegated Act, CDA; both reflect and urgent reality to help the states in reducing dependency on foreign fossil fuels (the act will enter into force in January 2023).
The CDA is a pragmatic proposal to ensure that private investments in gas and nuclear are needed for the states’ energy transition; investment in renewables is already a priority in the EU strategic approach (and in taxonomy). The CDA’s proposal ensures transparency: so investors will know what they are investing and businesses will have a much needed clarity to the EU’s position on sustainability.
Reference to arguments by M. McGuinness, Commissioner for the financial services, stability and capital markets union, in: https://ec.europa.eu/commission/presscorner/detail/en/IP_22_4349

There are some specifics in the Commission’s complementary delegated acts; generally, a delegated act “works” in the following way: the European Parliament and the Council “delegate” the Commission -under the EU taxonomy regulation – the power to adopt a delegated act; the “delegated procedure” is a quicker EU-wide legal instrument used for resolving some urgent European issues (which was the case under the previously adopted taxonomy regulation).
The Parliament and the Council have had officially four months (i.e. until this June) to scrutinise the document; both institutions could have additional two months of scrutiny time, which they didn’t use this time, of course.
Besides, for example, the Council would have the right to object to the act by reinforced qualified majority, which means that at least 72% of EU member states (i.e. at least 20 states) representing at least 65% of the EU population were needed to object to the delegated act. Whereas, the European Parliament could object by a majority of its members voting against in a plenary session (i.e.. at least 353 MEPs).
Two additional conditions are specified in the CDA:
= Introducing additional economic activities from the energy sector into the EU taxonomy. The text sets out clear and strict conditions, under Article 10(2) of the Taxonomy Regulation, subject to which certain nuclear and gas activities can be added as transitional activities to those already covered by the first delegated act on climate mitigation and adaptation, applicable since January 2022. These stringent conditions are: for both gas and nuclear, that they contribute to the transition to climate neutrality; for nuclear, that it fulfils nuclear and environmental safety requirements; and for gas, that it contributes to the transition from coal to renewables.
The Commission also adopted six amending Delegated Acts on such issues as fiduciary duties, investment and insurance; EU advice will ensure that financial firms, e.g. asset managers or insurers include sustainability in their procedures and investment advices to clients.
= Introducing specific disclosure requirements for businesses related to their activities in the gas and nuclear energy sectors. To ensure transparency, the Commission has amended the “taxonomy disclosures delegated act”, so that investors can identify which investment opportunities include gas or nuclear activities and make informed choices.

Present complementary delegated act is a result of Commission’s consultations with the EU states’ expert group on sustainable finance, the EU “platform on sustainable finance” and the opinion of the European Parliament. For instance, as a result of these feedbacks, targeted adjustments to the technical screening criteria and disclosure and verification requirements were introduced to reinforce their clarity and usability.
Delegated acts are to re-direct the member states’ economic growth along the modern “energy transition’s” paths, representing scientifically based direction towards national green energy system based on renewable energy sources. Such transition will also accelerate urgently needed public and private investment, as well as strengthen transitional transparency and information disclosure to assist investors in informed decisions “thereby avoiding any green washing”, noted V. Dombrovskis, Commission executive vice-president for the EU economic development.
See sustainable finance package in: https://ec.europa.eu/info/publications/210421-sustainable-finance-communication_en#taxonomy

Gas and nuclear energy in transition
Finally, stepping up public-private investment along green transition is aimed at to reaching the European climate goals by setting out strict conditions to support a gradual transition towards “green sustainability” and away from ecology-harmful energy sources.
By boosting market transparency the delegated acts will inform investors about perspectives and easily identified gas and nuclear activities in any investment decisions.
Hence, gas and nuclear energy sources are now included in the “taxonomy process”: transitional activities in these sectors will be allowed, however, in limited circumstances and under strict EU’s conditions. Nuclear path aligns with the EU’s pathway towards net-zero fossil fuels by 2050 and is thereby recognised as a vital step in the general European transition to more renewable sources of energy.
Targeted investments in both sectors are needed in both the short- and -medium terms: inclusion of gas and nuclear energy into transitional activities in the EU “taxonomy” is a small, albeit necessary part of the whole EU strategy focused on renewable energies. In this way, renewables will continue to be the focus for green investors and the creation of green financial products.
Reference to: https://ec.europa.eu/commission/presscorner/detail/en/IP_22_711

 

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