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Sorting green from greenwashing under the Commission’s new taxonomy rules

Last week the European Commission has published its EU-wide classification system for environmentally sustainable economic activities to help improve the flow of money towards sustainable activities across the European Union.

According to the Commission, the new set of measures will be instrumental in ensuring the transition in finance while preventing greenwashing, enhancing the reliability and comparability of sustainability information and eventually making Europe climate neutral by 2050.

One of the main element of the package is the EU Taxonomy Climate Delegated Act, a robust, science-based transparency tool for companies and investors, helping to determine which investments are environmentally sustainable. It also introduces disclosure obligations on companies and financial market participants.

The Delegated Act will cover the economic activities of roughly 40 per cent of listed companies, in sectors, such as energy, forestry, manufacturing, transport and buildings, which are responsible for almost 80 per cent of direct greenhouse gas emissions in Europe.

The regulation doesn’t yet create an exhaustive list of environmentally sustainable economic activities, but instead defines a general framework for what economic activities qualify as environmentally sustainable. It’s defined by the Commission as a living document and will continue to evolve over time, with more activities being added to its scope by amendments.

This is the reason why gas and nuclear power were left out of the political agreement following heated controversy.

The final decision on nuclear has been left to the detailed rules based on technical expert input, subject to do no significant harm criteria, in particular with regards to the disposal of waste, as well as specific references to life-cycle considerations.

The Commission said it will address natural gas in a second set of criteria due later this year to see how to ensure the role of gas in moving away from coal. The complementary Delegated Act, to be adopted later this year, will cover natural gas and related technologies as transitional activity as far as they fall within the limits of the EU Taxonomy Regulation. In addition, the Commission will consider specific legislation covering the gas activities that contribute to reduce greenhouse gas emissions but cannot be covered within the EU Taxonomy as they do not meet the screening criteria.

James Watson, Secretary-General of gas industry trade association Eurogas highlighted that an affordable energy transition means maximising the contribution of natural gas to decarbonisation, particularly in coal to gas switching.

“Eurogas is willing and ready to play its part to make sure that the green-finance drive can acknowledge and harness that in dedicated legislation,” he added.

For the agriculture sector, a decision was delayed as further progress on the negotiations are underway on the Common Agricultural Policy (CAP). Forestry and bioenergy are included in the taxonomy and will be updated later in line with the EU’s upcoming forestry strategy and revised renewable energy directive, which will be tabled in June.

However, critics were not satisfied with the outcome. According to Sandrine Dixson-Declève, Co-President of the Club of Rome and a member of EIT Climate KIC’s Advisory Council and the Platform on Sustainable Finance the “forestry and bioenergy outcome is disappointing, after a concerted effort and more ambitious recommendations from diverse experts to follow a comprehensive scientific evidence-based mandate.”

“We strongly recommend that at this point the European Commission demonstrates its leadership and ensures that the Delegated Act defines a coherent, credible, impactful and usable taxonomy for sustainable investment,” said Kirsten Dunlop, CEO of EIT Climate-KIC.

Once formally adopted, the EU Taxonomy Climate Delegated Act will be scrutinised by the European Parliament and the Council.

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