How will it work? The aim is to encourage investment flows from the financial sector to companies engaged in or moving towards more sustainable activities so that the EU can become carbon neutral by 2050. That’s what the bloc’s sustainable finance agenda and Green Deal are all aiming for. And in order to do that, the EU needs investors to redirect a vast amount of capital into the right type of projects and companies. Investors say they need better information on which to base their investment decisions so that they are not led astray or discouraged by “greenwash” claims. The commission is currently preparing an IT tool that will allow users to navigate easily through the taxonomy.
Who will the taxonomy apply to? To begin with, it will only apply to certain stakeholders such as member states, EU institutions and companies offering financial products. From next year, providers of financial products – including pension providers – in the EU must disclose which investments comply with the taxonomy’s climate criteria. For each investment, fund or portfolio, they must disclose what share of underlying investments comply with the rules. Large companies and listed firms must also disclose what share of their turnover and capital expenditure complies.
What makes a green investment? The taxonomy is a long list of economic activities - from steel plants, to wind power generation, to building renovations - plus detailed environmental criteria that each must meet to be deemed green. The rules classify three types of green investments. First, those that substantially contribute to green goals - for example, wind power farms. Second, those that enable other green activities - for example, facilities that can store electricity or hydrogen for use at a later time. And third, transitional activities that cannot yet be made fully sustainable, but which have emissions below industry average and do not lock in polluting assets or crowd out greener alternatives.
What does the taxonomy say about nuclear energy? The European commission said this week that it will include nuclear power in the taxonomy under a “complimentary delegated act” that will confirm the energy source is sustainable. Delegated acts are basically supplementary regulations that add to or amend EU legislation or rules. The commission also confirmed, however, that nuclear energy’s status is subject to the opinions of two expert groups –the Euratom Article 31 experts group and the scientific committee on health, environmental and emerging risks (Scheer). The commission said these reviews will be finalised in June 2021. Nuclear energy’s role in the taxonomy has already been reviewed by the Joint Research Centre (JRC), the commission’s scientific expert arm, which concluded that the fuel qualifies as sustainable. The JRC said the fatality rates characterising state-of-the art nuclear plants are “the lowest of all the electricity generation technologies”.
The taxonomy and nuclear waste The disposal of waste was one of the commission’s main concerns about including nuclear in the taxonomy. It said in February that while nuclear energy is generally acknowledged as a low-carbon energy source, opinions differ notably on the potential environmental impacts of nuclear waste. The JRC said storage of nuclear waste in deep geologic formations is “appropriate and safe”, although it noted that “no long-term operational experience is presently available as technologies and solutions are still in demonstration and testing phase”.
The taxonomy and Covid-19 The commission has said 25% of the EU’s proposed €750bn fund to help the bloc recover from the coronavirus pandemic will have to be 25% set aside for climate-friendly expenditure. This expenditure is likely to be guided by the taxonomy. And the do no harm test embedded in the taxonomy will in principle exclude fossil fuels, which is seen to be undermining other environmental objectives such as pollution prevention and control. If nuclear is approved by the two expert groups, t will be included as a climate-friendly investment.
What happens next? The taxonomy will be discussed with member states and European lawmakers before becoming law, but it is not yet close to being finished. To be deemed green, an activity must substantially contribute to one of six environmental aims and not harm the other five. The rules published on Wednesday cover two aims – fighting climate change, and adapting to its impacts. Criteria for the others will follow this year and next. According to the commission, the taxonomy is “a living document” and will continue to evolve over time, in light of developments and technological progress. The criteria will be subject to regular review.