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In order to meet the climate targets of the Paris Agreement and encourage more environmentally friendly investments, a new EU law establishes clear EU definitions of what ‘green’ actually is. This EU Taxonomy Regulation wants to prevent ‘green washing’ by the investment industry, and encourage investment products to voluntary adopt the official EU definitions. A new SOMO fact sheet explains what this Taxonomy Regulation entails and points out some of the loopholes and critiques of the law. It also contains a time line of continuing decision-making up to January 2023.

The EU taxonomy

A legal framework for defining green finance

The law provides basic definitions and criteria for the establishment of six broad categories of ‘environmentally sustainable economic activities’, ranging from climate mitigation and pollution prevention to transition to a circular economy. The law now also includes minimum social safeguards, compulsory standards for reporting and possibilities to expand the law to define what contributes to climate change or socially beneficial objectives. In addition, the law sets out the processes how to decide on detailed definitions in the next two years.

There is a great deal of concern and criticism about the effectiveness, loopholes and limitations of the taxonomy framework law and its aims. The most important one is its voluntary character. Only private investors that choose to adhere to the Taxonomy Regulation, are bound to apply it.  At the same time, there are no definitions of what activities contribute to climate change, from which the financial sector should divest. The financial sector and energy companies are fiercely lobbying against a strict taxonomy.

Until 18 December 2020, the EU is publicly consulting on what should be the detailed definitions of the first two categories: climate mitigating and climate adapting activities. By the 31st of December, the European Commission needs to decide how strict the definitions in these categories will be, for example regarding the use of gas.

The continuing taxonomy decision-making process will be part of the renewed EU strategy on sustainable finance. To be published by the European Commission in spring 2021.