What is the EU Green Taxonomy?
The Taxonomy regulation considers six environmental objectives, all equally weighted:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
So far, the Commission has adopted a first Delegate Act which covers the first two climate objectives.
An important feature of the EU Taxonomy is the introduction of mandatory disclosure obligations for many companies and investors, requiring them to disclose their share of Taxonomy-eligibility as well as Taxonomy-alignment.
Four overarching conditions must be met to qualify as environmentally sustainable; to be considered Taxonomy-aligned, an eligible activity must meet all the following criteria:
- Making a substantial contribution (SC) to at least one environmental objective.
- Doing no significant harm (DNSH) to any other environmental objective.
- Complying with minimum social safeguards (MSS).
- Complying with the technical screening criteria (TSC).
Disclosure of alignment of a company’s activities will enable comparisons of companies and investment portfolios and guide market participants in making informed investment decisions. The goal is tocreate investment security, protect private investors from greenwashing, help companies become more climate-friendly, minimize market fragmentation, and direct investment to the most appropriate areas.
Read our previous blog post for more insights about the EU Green Deal and Taxonomy regulation objectives.
Why the EU Taxonomy is important
To meet the EU climate and energy targets for 2030 and fulfil the objectives of the European Green Deal, we must direct investments towards sustainable projects, support companies transitioning to climate neutrality, and develop reliable tools to achieve these targets.
One such tool is the EU Taxonomy, which is instrumental in translating climate and environmental objectives into clear criteria and creating a frame of reference for investors and companies.
GreenWatch and the EU Taxonomy
GreenWatch is an algorithm-based tool developed at University College Dublin (UCD) inspired and partly funded by Science Foundation Ireland. In line with accelerating UN’s 7th, 8th, 9th, and 13th Sustainable Development Goals, GreenWatch’s AI for greenwashing detection tool analyses company’s sustainability claims compared to their emission performance.
GreenWatch rates sustainability claims made by companies in terms of their boldness and then contrasts this with the company’s actual performance in reducing greenhouse gas emissions in line with the UN Emission Gap Report and the EU Paris-Aligned Benchmark. Ultimately, the tool produces a classification into green leaders, hidden green champions, green incrementalists, or potential or probable greenwashers, depending on the likelihood of claims lacking substance.
By providing a clear definition and guidance of what constitutes sustainable activities, the EU Taxonomy prevents greenwashing, which aligns with GreenWatch’s objective: to detect greenwashing to help financial investors and other stakeholders make profound decisions. Detecting greenwashing is possible through a unified and acceptable definition of green; this Taxonomy lays the foundation for GreenWatch to analyze and report data valuable to hold companies accountable. In line with the publications of the Commission, GreenWatch focuses on the climate objectives for now by scrutinising firms’ greenhouse gas performance. For the future, we aspire to cover all the environmental objectives when criteria materialise into official legislation.
What’s new with the EU Taxonomy?
2022 kicked off with controversies about the EU Taxonomy. The inclusion of gas and nuclear activities to the Taxonomy. According to the complimentary draft Delegate Act (CDA) published by the Commission, natural gas and nuclear are to facilitate the transition towards a predominantly renewable-based future. Academic experts and scientists have highlighted the dangers of this proposal undermining the credibility of the Taxonomy and impacting investors who seek to invest in sustainable initiatives. Andreas Hoepner, the data subgroup lead at the Platform of Sustainable Finance, the expert panel advising the Commission on the Taxonomy and also a member here at GreenWatch publicly called the proposed criteria, dubbed #TaxonomyGate, “the biggest greenwash ever.”
Official feedback to the CDA draft from the platform members shows concern that the draft activities are not in line with the Taxonomy regulation, severely compromising the sustainable Taxonomy framework. Furthermore, the platform members also expressed deep concern about the environmental impacts of this inclusion. Read more on the CDA draft feedback.
Austria and Luxembourg even took a stance to file a lawsuit against the European Commission over labelling gas and nuclear energy as ‘green’ in the Taxonomy.
The Commission is due to meet now, at the beginning of February, to officially adopt the ultimate version of the CDA. It will then go into its scrutiny period after which it is voted on by the Member State Council and the European Parliament.
Stay tuned for our next blog post explaining the full greenwashing that this new CDA constitutes and how it can still be averted!