My dear Friends,

The EU introduced the EU sustainable finance taxonomy. Supporters hail this green investment rulebook as the key to more sustainable investing.

As investors, the most important question is, will this new rulebook impact any decisions we make when investing and how?

Is the EU taxonomy a unique chance for investing novices to make a difference? How do they prepare, and will they need to develop totally new investment strategies?

So, without further ado, let´s explore the fundamentals of the EU Taxonomy rulebook.

Join me, and I‘ll walk you through the fundamentals

pillars of the Taxonomy

In June 2020, the European Union published a regulation to establish a framework to facilitate sustainable investment.

On 2 February 2022, the Commission approved in principle a Complementary Climate Delegated Act, including, under strict conditions, specific nuclear and gas energy activities in the list of economic activities covered by the EU taxonomy.

In essence, the EU Taxonomy requires economic activities to contribute to at least one of six identified environmental goals whilst not violating the remaining five objectives.

The taxonomy rulebook is intended to help to achieve targets of net-zero carbon by 2050 and to reduce all emissions by 50% by 2030.

This endeavour will require a minimum of €1tn of sustainable investments from both public and private investors within the next decade. The taxonomy is intended as a classification tool to define which activities are sustainable and ‘green’.

We need reliable tools to support companies in the transition to climate neutrality and a sustainable economy. The EU Taxonomy is one such tool, translating the climate and environmental objectives into clear criteria, to create a common language around green activities. It will create a frame of reference for investors and companies

European Comission, FAQ EU Taxonomy, 21.04 2021

How will it work?

The Taxonomy makes it possible to define the environmental performance of several economic activities across various industries. The idea is to state requirements for corporate activities to be considered sustainable from an environmental perspective.

To catch up with the EU Taxonomy rulebook, companies will need to figure out what data they need, how to analyze it, and last but not least – how to report on it. The EU Taxonomy, in practice, implicates a more complex reporting process which requires companies to truly understand what they need to achieve in terms of reporting.

One could say that the EU Taxonomy is the EU’s answer to “what is green?” helping the market to gain greater clarity when implementing sustainable measures. 

The EU Taxonomy rulebook consists of a 600-page document including recommendations on taxonomy design and information about who has to do what and by when. There is also a shorter 67-page summary available.

The intention is to help to build toward improved environmental performance. Subsequently, the EU Taxonomy will entail more extensive reporting requirements for organizations affected by the law.

Who is affected?

The EU Taxonomy rulebook points out three groups of main taxonomy users: 

• Financial market participants offering financial products and services within the EU,  including occupational pension providers.
• Large companies will be required to provide a non-financial statement according to the Non-Financial Reporting Directive.
• The EU and the Member States when establishing public measures, standards or labels for green financial products or bonds. 

Although the EU Taxonomy focuses on sustainable finance, the scope is larger, stretching far beyond banking and other financial services in the long run. 

The new EU measures will have an enormous impact, not only within the EU but reaching far beyond the European Union. The EU Taxonomy will affect the broader financial regulatory arena, shaping the flow of investments and the practice of a range of financial professions. 

Performance thresholds

Companies will have to rethink the new requirements’ effect on their marketing and their broader investment strategies.

Further, companies will need to identify their resources, data, system seamlessly, and human resources to meet the established requirements.

To future proof companies, they will have to make a substantive contribution to one of six environmental objectives
– Climate change mitigation 
– Climate change adaptation  
– Sustainable and protection of water and marine resources 
– Transition to a circular economy 
– Pollution prevention and control
– Protection and restoration of biodiversity and ecosystems

Do no significant harm (DNSH) to the other five, where relevant

Meet minimum safeguards 
– For example, OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

A toothless tiger & the critics

Most environmental activists in Europe and members of the Green Parties consider the EU Taxonomy as a tool for greenwashing. Particularly because Nuclear Energy and Gas are classified as bridge technologies and will therefore fit the new criteria.

Some claim that thanks to massive lobbying by the financial industry and the energy sector, the taxonomy parameters were finally watered considerably and will therefore have little to no effect on reaching the climate goal by 2050.

But the true problem lies somewhere else, say the critics-the taxonomy is voluntary.

For example, a financial institution can decide to get a taxonomy certificate and focus its marketing on taxonomy criteria. They could, however, also choose to market their products without a mention of taxonomy standards and will therefore not need to implicate any of the taxonomy parameters. Neither would a company get fined for not implementing taxonomy standards.

Take-away

The EU Taxonomy rulebook leaves too many questions unanswered, especially for investors:

• Timing: Investors are required to make product-level disclosures before the reporting templates for these disclosures have passed into law.
• Data: There is limited public data on the taxonomy alignment of investee entities/assets.
• Interpretation: Investors are unclear on how certain performance thresholds should be interpreted.
• Interoperability: It needs to be ensured that the EU Taxonomy rulebook is coherent with other sustainable finance regulations(MIFID, Ecolabel).

At the end of the day, it is us, the investors, who will make the difference. It is our choice and our responsibility to make responsible choices. I think we do not need another toothless paper tiger to give instructions on how investors should make their choices.

As responsible investors, we must drive the change by making informed and sustainable decisions. We, as investors, must choose between short-term lucrative returns or a sustainable investment strategy that will benefit ESG standards and our coffers.

We, the investors, have a unique chance to make a crucial difference and bring the much overdue changes. Investing novices will have the privilege to develop investment strategies for the betterment of the world as much as their coffers- with or without yet another rulebook.