Clarity in green investments

The EU is investing many billions in achieving its ambitious climate goals (55% reduction of CO₂ emissions in 2030). However, it cannot fund the entire transition by itself. To close the 350 billion per year investment gap, drawing attention – and money – to sustainable investments will play a critical role. That works best if there is a common understanding of how you can determine whether something is a sustainable investment. This is why the EU commission is developing an EU Taxonomy (categorization) for investments.

The Taxonomy is also well received by the financial sector, in response to the fast growth of funds that claim the ‘green’ or ‘sustainable’ label. Serious investors seek a robust level playing field to compete in this new market. In this way, the Taxonomy project resembles the Product Environmental Footprint, which was initiated to end the confusion caused by the proliferation of ecolabels. In the future, the Taxonomy will become the basis for legislation and new taxation rules for investors.

The potential for huge impacts

CEOs listen to consumers, of course, but they may listen even better to the people and institutes who buy their stocks, provide loans and decide their bonuses. Once banks and investors start to prefer sustainable investments over other investments, companies will get engaged. By 2023, companies are also expected to report on the criteria set by the Taxonomy, so financials can more easily understand what they are investing in.

Supporting six important environmental objectives

In the Taxonomy Regulation (Art. 3), the European Commission defines the six environmental objectives they want to support and acknowledge with this Taxonomy:

1. climate change mitigation
2. climate change adaptation
3. the sustainable use and protection of water and marine resources
4. the transition to a circular economy
5. pollution prevention and control
6. the protection and restoration of biodiversity and ecosystem

The advice about assessing adaptation and mitigation has already been adopted by the European Council of Ministers. However, not everything regarding these two objectives has been settled yet. Perhaps readers still remember the question whether investment in natural gas or nuclear energy could be seen as Taxonomy-compliant. This debate is yet unresolved, but what has been determined is that all investments related to other fossil fuels are not Taxonomy-compliant.

This summer, the first draft for consultation was released for objectives 3, 4, 5 and 6. This is an interesting development for the LCA community: for these objectives, the entire value chain must always be assessed. However, for the Taxonomy, a qualitative assessment is needed. Unlike the PEF and what we are used to in LCA, the Taxonomy criteria are set as Yes/No.

Do good without doing harm

An investment can be regarded as Taxonomy-compliant if the investment leads to a substantial contribution to at least one of the six objectives, while not causing any significant harm. So, cutting down a forest to make room for photovoltaic cells may contribute to climate mitigation, but probably harms biodiversity.

To provide specific guidance, the draft contains an appendix of no less than 993 pages with detailed specifications per NACE code (a classification to define economic activities). This appendix provides investors and companies with a relatively straightforward reference to understand if an investment in an activity would qualify as Taxonomy-compliant. The rules are quite strict. For example: investing in crop production can be seen as a substantial contribution if it fulfills the EU biological production standard or uses the same rules about crop protection and nitrogen balance.

Another aspect of sustainability: the Social Taxonomy

An equally relevant Taxonomy angle is the Social Taxonomy report, based on the same principles. When a relevant actor breaks minimum standards somewhere in the supply chain, as defined in sources such as international Human Rights treaties or the OECD guidelines, an investment cannot be seen as Taxonomy-compliant.

The current proposal also suggests potential significant contributions to social issues, restricted to a yet undefined range of economic activities such as medical services and housing. At the same, time the proposal is that certain sectors can never be Taxonomy-compliant, such as tobacco and perhaps alcohol or sugary drinks.

The potential impacts on LCA

While the EU Taxonomy takes a full life cycle approach, it abstains from quantification. If the current proposal is adopted, the method will be very easy to use, just by looking up the relevant sector rules in the 993-page appendix.

In my thinking, this will streamline assessment. Guessing what it’ll do for LCA as a field is more difficult. On the one hand, it may reduce the need to quantify. On the other hand, companies still want to differentiate themselves from others and show what they are doing in particular to benefit the cause of sustainability.

Investors, too, are not robots that simply follow the Taxonomy rules. They may also want to differentiate themselves and only invest in the very best companies, which makes it valuable for companies to show their quality.

Either way, the developments around the EU Taxonomy are interesting to keep following – whether you’re with a company that issues shares, an LCA professional or just someone interested in how changing the flow of money changes the world.