EU taxonomy could deliver breakthrough in sustainable finance – researchers

The European Commission's forthcoming climate taxonomy could deliver on its promise to become the world's first unitary system for classifying the sustainability of investments, the German Institute for Economic Research (DIW) has said. The DIW researchers expect the taxonomy to generally fulfil its supposed role as a guiding system for investors, even though improvements in particular areas would still be advisable. "The EU taxonomy is going to help avoid greenwashing and fund the transition to a climate-neutral economy," the researchers say. The taxonomy "offers a huge chance" to achieve a breakthrough in aligning the financial sector with climate targets and could become a reference for investors and companies that need widely agreed definitions to gauge whether support programmes and other investments are in line with the goal of achieving net-zero emissions by 2050. However, while the taxonomy's criteria are expected to cover about 80 percent of direct greenhouse gas emissions in the EU, economic sectors such as aviation or retailing are not covered by the framework, the researchers say. Moreover, the taxonomy's logic is not fully applicable to "sectors that traditionally are hard to reconcile with climate action," such as the automotive or basic materials industries. These are given thresholds within the taxonomy that are supposed to gradually improve their climate balance, for example by only allowing zero-emissions propulsion systems by 2026, but it is unclear whether this is enough to put the sectors on a climate-neutrality path quickly enough. "Especially new investments in CO2-intensive industries come with the risk that thresholds that are set too low will lock in emissions-intensive technology and fossil infrastructure for a long time," the DIW authors conclude. If the threshold is set too high, however, only very few investments could be deemed sustainable, which is why the taxonomy should differentiate between investments that go into truly new projects and those used to finance existing installations, they recommend.

The full EU taxonomy launch is currently being coordinated within the EU institutions and is set to take place next year. Currently under debate are the technical screening criteria under which specific economic activities qualify as contributing substantially to climate change mitigation and climate change adaptation and for determining whether those economic activities cause significant harm to any of the other relevant environmental objectives. Environmental groups have called for making the taxonomy a standard tool for implementing the European Green Deal, whereas many companies are worried tighter sustainability regulation might limit their capability to secure funding for new investments.