Six questions about a promising instrument for Europe’s green agenda.
1. What is the EU Taxonomy?
In a nutshell: the EU taxonomy is a manual that will explain for each sector which economic activities are green and which are not. For instance, solar and wind energy are classified as green, but bio-energy only qualifies as green if they comply with strict criteria. “Look at it as the Oxford Dictionary of Sustainability,” says Veltmeijer. In 2022, companies (with more than 500 employees) as well as investors must report on this taxonomy. This will make clear to what degree the company, project or investment portfolio complies with the EU Taxonomy. Or in other words, exactly how green it is.
2. Why is this important?
The EU's green ambitions really raise the bar. Two examples: by 2050 net CO2 emissions in the EU must have been reduced to zero and by 2030 all plastic packaging must be recyclable. Precisely because the goals are so ambitious, it is essential that investments focus mainly on economic activities that are indeed sustainable.
This manual can be a huge help for companies that aim to become genuinely more sustainable. The taxonomy is a useful tool in this process. “Because it sets out in great technical detail what is and what is not sustainable, so that there can be no doubt about this,” says Veltmeijer. “This is important for several reasons. For instance, there are many companies that do really want to contribute to a better world, but don’t know quite how they should approach this. This manual can help them enormously in their efforts to really become more sustainable. It will guide their sustainability strategy. The Taxonomy describes, for example, what criteria forestry or the production of cement must comply with in order to qualify as green.”
Furthermore, the taxonomy can prevent greenwashing. Some companies and investors describe their projects or investments as ‘green’ even though that is a long way from the truth. The taxonomy can put a stop to that. “A case in point is bio-energy. This is often presented as a sustainable energy source, but that can be debatable. The taxonomy will provide clarity on this issue. You may or may not agree with the verdict, but that is what it is.”
3. Is it not tricky to establish what is and what is not sustainable?
Absolutely! But the EU nevertheless hopes to be able to achieve this on the basis of six environmental goals, including the transition to a circular economy and climate mitigation (i.e. reducing global warming). For all six goals, the EU sets out which measures contribute to their realisation and how sustainable they actually are. Also, each goal incorporates the ‘do no significant harm’ principle, describing the actions that companies must actually avoid because they hinder the realisation of other goals. Take, for instance, windfarms: very sustainable, according to the taxonomy, but they must not harm the habitat and safety of animals.
“It must really be a comprehensive and watertight manual. Because if there are any loopholes, something that is not sustainable may still be recognised as sustainable,” says Veltmeijer. “Take solar energy: in the first version of the taxonomy this was always labelled as sustainable. This seems perfectly logical, but it isn’t quite as simple as that. Solar panels may, for example, contain conflict materials. And what happens to solar panels at the end of their useful life? If nothing is specified about this issue, all solar panels will qualify as green, even if they are simply dumped in a landfill. That can of course never be the intention.”
4. When do companies and investors need to start applying the EU Taxonomy?
The rollout of the taxonomy has been subject to delays for a while now. And that is mainly due to lobbying by various sectors. Companies and investors were originally supposed to start reporting on the first two goals (climate mitigation and climate adaptation) as from this year, but this requirement has been postponed until the summer of 2022. “Everyone wants to have a say and move the boundaries of what is considered green. For instance, many agricultural businesses are asking for extra time to adapt”, says Veltmeijer. “That should definitely be avoided, because there is no time to spare. We need to start building an ecologically and socially resilient food system right now.“
Fortunately, the rollout of the taxonomy has not ground to a complete halt. For example, the first two goals have already been finalised. The draft versions of the other four goals will be published sometime this year.
Veltmeijer is happy with the taxonomy as it stands so far, although she does have concerns: “Following scientific evidence, the European Commission (EC), concluded that fossil fuels cannot be viewed as sustainable. Triodos Bank agrees that fossil fuels should never be viewed as sustainable. Nevertheless, the EC has decided to evaluate later this year if natural gas can qualify as sustainable so that it can be used by countries that want to move away from brown coal.“ Triodos Bank signed a call from WWF together with more than 200 other organisations that natural gas should not be considered as a sustainable source of energy.
“We are also seeing a lot of lobbying aimed at having bio-energy (burning wood in order to generate energy, ed.) labelled as a sustainable energy source. That must not happen: burning wood releases more CO2 into the atmosphere than burning fossil fuels and it can take decades for trees to grow back. There is no way that you could call that green.”
5. What is the potential impact of the EU taxonomy?
Starting next year, large companies will be required to report on the first two goals. For smaller companies this is not mandatory, but Veltmeijer expects that many companies will do so anyway. Because the EU is also working on developing an eco-label for financial products, such as impact bonds. However, a product will only get an eco-label if it complies (to a specific degree) with the guidelines set out in the taxonomy. In other words, it pays to get on with this. Veltmeijer therefore expects that the EU taxonomy will become an important instrument for reaching the defined climate ambitions: “It can give a huge boost to the flow of funds towards solutions that address climate change.”
6. What does the EU Taxonomy mean for investors in the Triodos Impact funds?
In the not too distant future, investors will be able to determine exactly to what extent investment funds and portfolios comply with the EU taxonomy. So, they can tell exactly how sustainable they are. “We, too, will have to report on the taxonomy, in order to demonstrate to what degree our investment portfolios comply with the taxonomy,” explains Veltmeijer. “I expect that this will confirm that we are on the right track. Because we make very deliberate investment decisions, on the basis of strict sustainability criteria.” For instance, Triodos Investment Management already invests in organisations such as NRW.BANK (the bank for the German state of North Rhine-Westphalia), which are already aligning their frameworks for issuing green bonds with the EU taxonomy.
“But our investment portfolios will not fully meet the requirements of the taxonomy”, warns Veltmeijer. “A large proportion of our investments focus on social issues and are therefore outside the scope of the taxonomy. Because the taxonomy does not yet address these issues.”
On 21 April 2021, the European Commission published the criteria of the so-called taxonomy, which determine whether an investment is sustainable or not. According to Triodos Bank, the criteria are a step in the right direction, mainly because an earlier proposal to qualify natural gas as sustainable has – for the time being – been withdrawn. Find out more.