The European Taxonomy: Redirecting Investment Towards Green Objectives

The European Union Green Taxonomy categorizes environmentally friendly economic activities. It is considered an environmental compass for identifying private investments aligned with the EU climate and environmental objectives.

The regulation establishes reporting requirements for financial and non-financial companies concerning the proportion of their green investments. This document is a powerful tool for the transition of economic activities, as it enables to:

Improve the transparency of the private sector in terms of sustainable investments;
Redirect capital flows towards sustainable investments;
Facilitate the integration of sustainability issues into risk management.

HISTORICAL SUMMARY

Launched in 2018 by the European Commission, the primary aim of this text was to guide and mobilize private investment to achieve climate neutrality by 2050.

As a first step, a group of scientific experts was brought together to establish criteria and gauge the environment of economic activities to achieve carbon neutrality ambitions by 2050 and 2030.

The result was a set of criteria for analyzing whether an economic activity qualifies for a ‘green’ label, stipulating that it makes a substantial contribution to at least one of the European Union’s six environmental and climate objectives.

THE EUROPEAN TAXONOMY APPROACH

The six objectives of the European Taxonomy are as follows:

Climate change mitigation (Climate Delegated Act);
Climate change adaptation (Climate Delegated Act);
Sustainable use and protection of water and maritime resources (Delegated Environmental Act);
Transition to a circular economy (Environmental Delegated Act);
Pollution prevention and control (Environmental Delegated Act);
Protection and restoration of biodiversity and ecosystems (Delegated Environmental Act).

More than a hundred economic activities are listed as contributing to the six climate and environmental objectives.

The Taxonomy also distinguishes two categories of activities:

‘Enabling’ activities – activities that enable other activities to contribute to one of the objectives, thereby promoting the development of sustainable sectors;
‘Transitional’ activities – activities for which there are no low-carbon alternatives, but their greenhouse gas emissions correspond to the best performance in the field.

➠ In this context, gas and nuclear energy are considered ‘transitional’ activities.

To determine whether an economic activity is ‘green’ within the meaning of the Taxonomy, three steps must be followed:

Eligibility: an activity is considered ‘eligible’ if it is included in the evolving list of activities appearing in the delegated acts of the Taxonomy regulation. It is likely to contribute to at least one of the six objectives.
Alignment: an ‘eligible’ activity is considered ‘aligned’ if it meets the following criteria:
- It meets the technical alignment criteria defined for the activity;
- It does not harm any of the other five objectives (DNSH - Do No Significant Harm);
- It complies with minimum guarantees such as the OECD and UN guidelines.

A company can have eligible but non-aligned activities. However, it is important to report these elements to demonstrate transparency.

This shows that the company has green activities, but does not yet fully meet the alignment criteria.

The third fundamental step of the Taxonomy consists of indicating the proportion of investments covered by these green activities.
- The green share of turnover;
- The green share of investment spending (CapEx);
- The green share of operating expenses (OpEx).

THE APPLICATION FRAMEWORK

The companies subject to the reporting obligation under the Green Taxonomy are the following:

Non-financial companies, mainly large listed and unlisted companies with more than 250 employees.
Financial companies, such as credit institutions, insurance companies, and investment companies.