The EU taxonomy classification system identifies which economic activities are considered environmentally sustainable and to what degree through several specified criteria.
The goal is to reorient capital flows to more sustainable activities, not only to industries that are already green but also by providing funding for high-emissions industries' contributions to the transition towards a zero net emissions economy.
If this succeeds in mobilising investors, it could potentially channel billions in capital in support of sustainable objectives, providing a great opportunity for industry leaders in relation to the green agenda.
Investing sustainably is increasingly important for investors and companies. As a part of the EU Action Plan on Sustainable Finance, the Commission has introduced the taxonomy (see the technical report on the EU taxonomy here), which creates an EU classification system for sustainable activities. It provides an implementation tool to enable capital markets to identify and respond to investment opportunities that contribute to environmental policy objectives.
The taxonomy provides a unified framework for determining whether an economic activity is considered sustainable across all EU countries. This increases transparency and comparability of green investment products, including green bonds. It also lightens the burden of issuers and investors in terms of creating case-by-case frameworks for green financing. The goal of this is to increase the flow of finance to green and sustainable projects, at the same time increasing transparency and avoiding ‘green washing'.
The aspects of the taxonomy that relate to climate change adaptation and mitigation are being finalised in 2020 and are set to enter into force in December 2021. It is worth noting that the final technical report on climate change objectives is due to for release in mid-March, which could lead to changes compared with the overview given in this research piece. We expect the criteria for the remaining environmental objectives to apply from December 2022.
Criteria and objectives
For the taxonomy to deem an economic activity to be environmentally sustainable, it should substantially contribute to at least one of six environmental objectives, presented above right. In addition, it should do no harm to any of the remaining environmental objectives. Likewise, it should meet ILO standards for minimum social safeguards, which cover issues including basic human rights, minimum wages, industrial relations, employment policy, social dialogue and social security.
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