Greening finance: exploring the new EU taxonomy and its impact on sustainable investments

Lauren Giralt

The issue of climate change has become a major issue of which the European Union is finally aware. It has taken a major step forward with the introduction of the EU Taxonomy. The scheme unveiled in 2020, and is poised to revolutionise the way we think about, and value sustainable investments. It was designed with the aim of aligning financial flows with the EU’s ambitious climate goals. So the EU Taxonomy is more than a regulatory measure; This is a paradigm shift towards a greener and more sustainable future.

The EU Taxonomy is essentially a detailed classification system that outlines what qualifies as environmentally sustainable economic activities. It serves as a shared language for investors, businesses, and policymakers to recognize, and support activities that help combat climate change, adapt to its effects and promote overall environmental sustainability.

By setting clear criteria for green investments, the EU aims to boost sustainable finance and direct capital towards projects that genuinely benefit the environment.

“The European Commission has adopted a set of proposals to make the EU’s climate, energy, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.”

Main goals of this scheme

The EU Taxonomy is built on 4/5 pillars towards specific goals vital for a sustainable future. Firstly, it addresses climate change mitigation, aiming to encompass activities that play a significant role in curbing greenhouse gas emissions. This includes sectors like renewable energy, energy efficiency, and low-carbon transport, crucial in our battle against climate change.

Secondly, the scheme prioritizes climate change adaptation, concentrating on activities that assist societies in adapting to the challenges posed by a shifting climate. Investments in flood protection, tolerant agriculture, and resilient infrastructure are pivotal in building climate-resilient communities.

It also encompasses sustainable use and protection of water and marine resources. This involves activities related to water conservation, wastewater treatment, and the sustainable management of marine ecosystems. Safeguarding these resources is paramount for the well-being of our planet.

Another pillar advocates for the transition to a circular economy, promoting resource efficiency, waste reduction, and material recycling. Beyond its environmental benefits, embracing a circular economy fosters innovation, cost reduction, and heightened competitiveness.

Finally, a crucial aspect is preventing and controlling pollution, underscoring the need to reduce pollution and mitigate its harmful effects on human health and the environment. Investments in clean technology, waste management, and pollution control measures are pivotal in preserving biodiversity, safeguarding human health, and ensuring a sustainable planet for future generations.

Source: Factsheet sustainable finance

Its impacts and what it entails

This taxonomy has far-reaching implications for a wide range of stakeholders. For businesses, it provides a roadmap to align their operations with sustainable practices, improving transparency and accountability. Investors now have a clear framework to assess the environmental credentials of potential investments, reduce greenwashing, and ensure that capital is directed to truly sustainable businesses.

In addition, the taxonomy will undoubtedly influence regulatory and policy decisions. It has the potential to shape programs at different scales of sustainable development, stimulate innovation, and stimulate economic growth in green sectors. The taxonomy is also expected to foster international cooperation, as other regions and countries are likely to adopt similar frameworks to harmonize global efforts to combat climate change.

Still, there are challenges ahead

While this is a monumental step towards a more sustainable future, it is not without its challenges. Finding the right balance between ambition and feasibility, ensuring inclusiveness in various sectors, and addressing the concerns of small and medium-sized enterprises are among the main hurdles to overcome.

Have already been put in place

The EU Taxonomy Calculator offers a guide for non-financial businesses on how to use templates in the Disclosures Delegated Act. These templates help them determine their eligibility and alignment with the Taxonomy, as well as calculate Key Performance Indicators (KPIs). Currently, the calculator is limited to assessing the turnover, Capital Expenditure (CapEx), and Operational Expenditure (OpEx) KPIs for non-financial businesses specifically for the purpose of addressing Climate Change Mitigation.

In short, the EU Taxonomy is more than just a regulatory framework; It is a visionary tool designed to reshape our economic landscape in the face of climate change. As it gains traction, it will not only make our financial systems greener but also steer us towards a more enduring and resilient tomorrow. Through collaboration, innovation, and unwavering commitment, we can leverage the power of the EU Taxonomy to pave the way for a lasting and thriving future.

Sources

Photo credit: Blue auditor