Sustainable Business

Explainer: What is the EU’s sustainable finance taxonomy?

3 minute read

An aerial picture shows the four natural-gas power plants "Gersteinwerk" of Germany's RWE Power, one of Europe's biggest electricity and gas companies near the North Rhine-Westphalian town of Hamm, Germany May 6, 2015. REUTERS/Wolfgang Rattay

Register now for FREE unlimited access to reuters.com

BRUSSELS, April 21 (Reuters) - The European Union on Wednesday published the climate change section of its “sustainable finance taxonomy”, a complex system to classify which investments are truly green.

Starting next year, the long-awaited rules will decide which economic activities can be labelled as a sustainable investment in the EU.

Here's what you need to know.

Register now for FREE unlimited access to reuters.com

WHAT'S IT FOR?

The EU's goal to eliminate its net emissions by 2050 will require huge investments, much of it private funding. The taxonomy aims to make green activities more visible and attractive to investors.

With a myriad "eco-friendly" investment products on the market, the rules also aim to stamp out greenwashing, whereby organisations exaggerate their environmental credentials.

WHO DOES IT APPLY TO?

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.

That means polluting companies can get recognition for making green investments. For example, if an oil company invested in a wind farm, it could label that expenditure as green.

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.

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. An example of that would be a cement plant with emissions below 0.72 tonnes of CO2 equivalent per tonne of grey clinker produced.

WHY HAS IT TAKEN SO LONG?

The rules published on Wednesday arrived months later than planned, and after more than a year of intense lobbying from EU governments and industries.

The criteria are based on recommendations from expert advisers, designed to comply with science-based goals to fight climate change. However, some advisers are unhappy with the final proposal, and say scientific criteria were sidelined in the EU’s political fighting over the rules.

The EU has dodged contentious decisions on whether to label gas power plants, nuclear energy or the agriculture sector as green. A separate proposal on those issues is due later this year.

IS THAT IT?

No. The taxonomy is not nearly 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.

Brussels is also considering expanding the system. One option being considered is a list of polluting activities, to force providers of financial products to flag their "unsustainable" investments.

Register now for FREE unlimited access to reuters.com
Reporting by Kate Abnett and Simon Jessop; editing by David Evans

Our Standards: The Thomson Reuters Trust Principles.

More from Reuters