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  • Writer's pictureFiona Smith

EU Taxonomy - the classification system for sustainable activities

In March 2020, the EU launched the final report of its Technical Expert Group, which had spent two years working on the 'Taxonomy' – a classification system for sustainable activities.

Here, IFNC Executive Coordinator ORLAITH DELARGY explains what it is and what it means for natural capital in Europe...

What is the Taxonomy?

Essentially, it’s the EU’s list of “sustainable activities”. The idea is that if we create a common understanding of what constitutes a sustainable activity across the EU, we can avoid greenwashing and boost investment in sustainable projects. The Taxonomy is a key part of the EU Sustainable Finance Action Plan, although it still needs to be officially signed off by the EU.

What’s the methodology of the Taxonomy?

For an activity to be deemed sustainable, it must:

The Taxonomy sets performance thresholds (referred to as ‘technical screening criteria’) for how these economic activities can ‘substantially contribute’ and ‘do no significant harm’.

The six objectives are:

  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.

So far, a list of activities has been developed for the first two objectives only.

Who’s involved?

The list has been developed over the last few years by the Technical Expert Group (TEG). The TEG is a temporary body, due to be disbanded in September 2020. Eventually, the EU will establish the Platform on Sustainable Finance – a permanent body to be set up under the Taxonomy Regulation.

What’s on the list of sustainable activities?

So far, the Taxonomy only covers the first two objectives listed above – climate mitigation and adaptation.

For climate mitigation, the list refers to activities that either mitigate climate change in and of themselves, or enable climate change mitigation. You can view the full list of these activities on p.56 here

As an example, Afforestation is classified as an activity that makes a ‘substantial contribution’ to climate mitigation through the performance of the activity itself. By contrast, the Storage of Electricity is classed as an activity that enables climate change mitigation, and the Manufacture of Biogas or Biofuels is viewed as a transitional activity.

Determining activities that make a substantial contribution to climate adaptation is a little trickier, as context is king for climate adaptation. Activities must conduct a risk assessment and a plan to address the all material vulnerabilities to the economic activities.

What’s off the list of sustainable activities?

Lots of activities are not on the list. Some of the more controversial exclusions include Nuclear energy, Unabated natural gas and Waste to energy. Although these activities can “significantly contribute” to climate mitigation, the TEG determined that these activities do not meet the “do no significant harm” criteria for the other five sustainability objectives.

What’s next?

The TEG will disband in September 2020 and the EU will establish the permanent Platform on Sustainable Finance. This Platform will need to develop taxonomies for four other objectives: sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; protection and restoration of biodiversity and ecosystems.

The EU is also revising its Non-Financial Reporting Directive (NFRD), which determines the non-financial information that companies should disclose. This information often relates to environmental issues. The TEG has recommended that the NFRD should oblige companies to disclose how their activities align with the objectives of the Taxonomy.

The TEG has also recommended to the Commission that the Taxonomy should be extended to cover social objectives and 'brown' activities.

How does this all relate to natural capital?

Natural capital is now at the heart of EU policy. The European Green Deal aims to "protect, conserve and enhance the EU’s natural capital, and protect the health and well-being of citizens from environment-related risks and impacts."

The taxonomy is a way for investors and the public to asses which business activities and infrastructure projects are likely to protect and enhance natural capital. By providing this coherence, the EU aims to change the flow of finance from brown activities to green.

The author would like to acknowledge the reporting in this Environmental Finance article, which contributed to this piece. -

Download the final report here

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