What is the EU’s “green” sustainable finance taxonomy?

Proponents say it is the world’s most ambitious green investment rulebook and could channel huge sums of money to combat climate change. Critics say it is a “greenwash” that jeopardizes the EU’s climate change goals.

So what is the classification of sustainable finance in the European Union?

What is the classification?

The EU classification is a complex system for classifying the parts of the economy that can be marketed as sustainable investments. It includes economic activities, as well as detailed environmental criteria that each economic activity must meet to obtain a green card. Rules for most sectors came into effect this year, and include investments including steel mills, electric cars and building renovations.

However, gas and nuclear power rules have been long overdue amid intense pressure from governments differing over whether the fuel helps fight climate change.

What do you say about gas and nuclear energy?

The European Commission put forward a proposal in February to add gas and nuclear power plants to the classification if they meet certain criteria. The European Parliament backed the proposal in a vote on Wednesday, paving the way for it to become law and take effect from 2023. Twenty of the EU’s 27 member states can veto the proposal, but that is seen as unlikely.

Under the committee’s proposal, for a gas-fired power plant to be considered environmentally friendly, it must emit no more than 270 grams of CO2-eq per kilowatt-hour, or have an average emission of 550 grams CO2-eq/kW on the The course of 20 years. It should also commit to transitioning to low-carbon gases by 2035.

The commission’s original proposal for the gas, published in late 2020, included a limit of less than 100 grams of carbon dioxide. It was revised after a backlash from countries including Poland and Bulgaria, who say gas investments are needed to ditch more polluting coal. Others, such as Denmark and Luxembourg, say it is not credible to classify gas, a fossil fuel, as green.

What is the classification?

The classification does not prohibit investments in activities that are not marked as “green,” but limits those that companies and investors can claim are climate-friendly. The EU’s goal of eliminating its net emissions by 2050 will require huge investments, mostly private financing. The classification aims to make truly green activities more visible and attractive to investors.

The rules also aim to eliminate greenwashing, in which organizations exaggerate their environmental credentials, among the so-called green investment products.

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Who does this apply to?

Providers of financial products – including pension providers – in the EU must disclose investments that comply with climate criteria for classification. For each investment, fund or portfolio, they must disclose the share of the underlying investments that comply with the rules. Large corporations and listed companies must also disclose their share of their turnover and the capital expenditures they comply with.

This means that polluting companies can gain recognition for making green investments. For example, if an oil company invests in a wind farm, it can classify that spending as green.

What makes a “green” investment?

The rules classify three types of green investments. First, those that contribute significantly to green goals, for example, wind farms.

Second, those that enable other green activities, for example, facilities that can store renewable electricity or hydrogen. Third, transitional activities that cannot be made fully sustainable, but have emissions below the industry average and do not lock up polluting assets or crowd out greener alternatives. Gas and nuclear power plants are classified as transitional activities.

Why did this take so long?

The gas and nuclear bases have faced more than a year of intense pressure from EU governments and industries. EU policymakers had hoped to end climate rules in 2020. Ultimately, the EU published a set of rules covering most sectors in April 2021, deferring gas and nuclear standards until this year. The criteria are based on recommendations from expert advisors, designed to align with science-based goals to combat climate change. But some advisers say scientific standards have been sidelined in the EU’s political struggle over rules.

Is that all in the rating?

no. For an activity to be considered environmentally friendly, it must contribute significantly to one of the six environmental goals and not harm the other five. So far, the rules cover two goals – combating climate change, and adapting to its effects. You will follow the standards for others this year.

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