What is going on with the EU Taxonomy Regulation?


The EU’s Sustainable Finance Taxonomy – Regulation (EU) 2020/852 is a legal framework that sets out a classification tool that can be used by companies and investors. Although it was published in June 2020 and came into force in July 2020, it has recently been subject to a lot of discussion due to an amendment proposed by the European Commission.

The original EU Taxonomy Regulation

The EU Taxonomy is a system that defines the environmental performance of economic activities across industries. The intention behind the EU Taxonomy was to create more security for investors and to prevent greenwashing.

Although the EU Taxonomy framework will be applicable to any company and investor, it is mandatory for two key groups: (a) financial market participants who offer financial products within the EU and the UK, and (b) large public interest companies who are subject to the EU’s Non-Financial Reporting Directive 2014/95/EU.

Financial Market Participants:

This first group is required to disclose how their financial products contribute to the 6 environmental objectives as specified by the EU Taxonomy. These 6 environmental objectives include:

  1. Climate change mitigation
  2. Climate change adaptation
  3. The sustainable use and protection of water and marine resources
  4. The transition to a circular economy
  5. Pollution prevention and control
  6. The protection and restoration of biodiversity and ecosystems

Moreover, Financial Market Participants are also required to describe the extent to which the underlying investments in their products contribute to sustainable economic activities. This is expressed as a percentage of the investments in sustainable economic activities as compared to the total investments in the financial product. If a financial product does not contribute to an environmental objective, this must be disclosed.

Financial Market Participants were required to start making their disclosures in regard to the first two climate objectives (climate change mitigation & climate change adaptation) as of 31 December 2021. Reporting regarding the remaining 4 climate objectives is required as of 31 December 2022.

Large Public Interest Companies:

These companies must include in their legally required non-financial statements whether their activities are environmentally sustainable. They must describe the extent to which their turnover, capital expenditure, and operating expenditure is associated with sustainable economic activities as defined under the EU Taxonomy.

For Large Public Interest Companies, disclosures in the non-financial statement within their annual reports are required in relation to the first two climate objectives during 2022, and for all six objectives by 31 December 2023.

Further Requirements:

Both Financial Market Participants and Large Public Interest Companies must meet the following requirements whenever they report on their contribution to any of the 6 climate objectives:

  •  the activity may not simultaneously negatively impact any of the other objectives;
  • the activity has to meet certain social and governance standards; and
  • the activity has to meet the ‘technical screening criteria’.

The EC proposed inclusion of natural gas and nuclear activities under the EU Taxonomy

Although the original intent of the EU Taxonomy Regulation was to prevent greenwashing, the European Commission proposed some additions to the regulation on December 31st which would be in direct contradiction of that purpose. The changes have been implemented in the Taxonomy Complementary Climate Delegated Act, which was presented on February 2nd, 2022. The Act is set to come into force as soon as it has been translated into all EU languages.

The highly contested changes concern the sustainable label given to certain fossil gas- and nuclear activities. In doing so, these activities are seen as green investments. However, the scientific community heavily disagrees with the sustainable labels these activities receive, and they claim that this could disrupt the EU’s commitments to the Paris Agreement targets.

The European Commission, in turn, argues that nuclear and fossil gas activities have no low-carbon alternative yet that is technologically and economically feasible. The Commission furthermore claims that fossil gas and nuclear activities contribute to climate change mitigation. Inclusion of fossil gas and nuclear power is, according to the Commission, subject to strict criteria, that are supposedly science-based. Yet, scientists claim that the criteria are neither strict nor based on science.

The Problem with Fossil Gas under the EU Taxonomy Regulation

Under the Complementary Climate Delegated Act, gas power plants with construction permits granted prior to 2030 are legally compliant if they emit 550 Kg of carbon dioxide per kilowatt of its capacity over 20 years. According to calculations, this could result in more than 1.4bn tonnes of CO2 being emitted. Moreover, the International Energy Agency has stated that we have to stop all fossil gas investments from 2022 onwards to make the 1.5 Paris Agreement temperature goal.

The Problem with Nuclear Activities under the EU Taxonomy Regulation

Encouraging nuclear activities places a heavy burden on future generations to deal with nuclear waste. The very nature of uranium mining and milling, as well as the problems associated with storing nuclear waste, will potentially cause a lot of harm to the environment. As this study proves, there is no legal base whatsoever for including nuclear energy in the EU taxonomy.

Nuclear projects with a construction permit issued prior to 2045 are considered a sustainable investment if there is a plan in place regarding how to deal with the management and decommissioning of radioactive waste. There is however no viable long-term solution yet on how to deal with nuclear waste.

There are several countries that have tried to block the additions to the legislative framework. However, because these are additions to an existing law, they would have to let the entire EU Taxonomy Regulation fail in order as they cannot opt for specific parts of it not to be applicable. The European Commission does not seem to listen to any opposing views, even though scaling up investments in renewables is much greener and more sustainable.