How the new European green taxonomy will work
Fernando Gutiérrez del Arroyo González
21 Dec, 2022
To boost sustainable finance and reduce greenwashing, the European Union (EU) has established the Taxonomy, a classification system of which activities can be considered “sustainable” from a climate and environmental point of view (the E in the acronym ESG). The main objective of the Taxonomy is to provide robust definitions and transparent disclosure requirements to promote the channelling of financing to activities that contribute substantially to resolving the climate and environmental emergency. Although it will take time to develop and apply, it is the cornerstone of the European Commission’s Sustainable Finance Action Plan and will serve as a global benchmark. In addition, the creation of an EU-wide Taxonomy will help to overcome the current partial and inconsistent frameworks and prevent the emergence of national Taxonomies in member states, which could encourage the use of looser definitions (race to the bottom).
The Taxonomy allows (or, in certain cases, requires) companies (financial and non-financial) to calculate how green their activities are. Thus, current regulation establishes that an activity is considered “sustainable” for the purposes of the Taxonomy if it contributes substantially to certain environmental objectives (such as climate change mitigation or adaptation, among others), without harming any other, while complying with minimum social safeguards and technical screening criteria. The first two conditions are the fundamental ones, the third is a guarantee of respect for minimum rights and the fourth is an instrumental condition setting out the details for meeting the first two (a detail that is essential in practice). The regulation also sets out requirements for disclosing alignment with the Taxonomy according to specific formats and content, seeking to foster transparency and prevent “greenwashing”.
Recent publications give an indication of where the development of the Taxonomy will head in the coming years. Beyond the evolution and updating of existing regulation, two possible extensions are taking shape:
→ The traffic-light Taxonomy: the taxonomy is currently binary (activities are classified as sustainable or not). As it evolves, the Taxonomy will cease to be binary and will allow activities to be classified into different groups (red, amber, green or white), acquiring a richer language, but one that is also more complex to apply.
→ The social Taxonomy: the current Taxonomy is limited to the environmental sphere and does not extend to the social one. Given that the EU is interested in achieving the SDGs (Sustainable Development Goals), respecting basic rights and increasing the potential of social investment, a possible extension of the Taxonomy to the social sphere with the aim of promoting investments that solve social problems would be logical, although this would once again increase the complexity and overlap of requirements for those subject to them and users.
The impact of the Taxonomy on markets is expected to be profound, as it will allow a progressive distinction between companies according to their degree of alignment with it and will promote the channelling of financing towards those whose contribution to the ecological transition is most ambitious and lasting.
Economista especializado en finanzas sostenibles, regulación ESG y análisis regulatorio. Actualmente, director de control interno ESG en Banco Sabadell. Ha trabajado en el Banco de España, en Solchaga Recio & Asociados y Metyis.
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