Simon Jessop, Kate Abnett

BRUSSELS, (Reuters) – Supporters claim it is the most ambitious global green investment guidebook. It could help to direct large sums of money towards combating climate change.

Critics argue that it’s “greenwashing”, which could put the European Union’s climate change goals at risk.

What is the EU’s Sustainable Finance Taxonomy?

What does it do?

It is difficult to determine which areas of an economy are sustainable investments. The EU taxonomy makes it complicated.

The document includes extensive information on economic activities and detailed requirements for each to be awarded a green certification.

The rules covering most industries, such as steel plants and renovations, came into force this month.

Despite intense lobbying and disagreements from various governments about the effectiveness of nuclear and natural gas, rules regarding these fuels have been delayed for a long time.

The European Commission presented Wednesday a green-label proposal for certain gas and nuclear investment. It will be effective from 2023 unless it is vetoed by the majority of European Parliament or 20 EU member countries.

WHAT IS IT FOR?

While the taxonomy doesn’t prohibit investments in non-green activities, it does limit which investors and companies can say they are climate-friendly.

To achieve its goal of eliminating net emissions by 2050, the EU will need large investments. Much of this private financing is required. This taxonomy is designed to increase visibility and appeal to investors for truly green activities.

A multitude of “ecofriendly” investments products are already available. These rules will help to eliminate greenwashing which is when organisations exaggerate the environmental benefits they offer.

WHO IS IT FOR?

EU providers of financial products, such as pension providers must declare which investments are compliant with taxonomy’s climate criteria. They must also disclose the percentage of their underlying investments that comply with these rules for each portfolio or investment fund.

Companies listed and large companies must reveal what percentage of their capital expenditure and turnover is compliant.

It means companies that are polluting can receive recognition for green investments. An example: If an oil company made a purchase in a windfarm, that could be labelled as green.

What IS A “GREEN” INVESTMENT?

These rules distinguish between three kinds of green investment.

First, they must be able to contribute significantly towards green goals.

They also allow other green activities such as storing electricity and hydrogen to be used later.

Third, activities in transition that are not fully sustainable yet but still emit less than industry average, and which do not crowd out more environmentally-friendly alternatives. A cement plant that produces less than 0.72 tonnes CO2 equivalent per ton of grey clinker would be an example.

As transitional activities, gas and nuclear power stations are included.

WHY IS IT TAKEN SO LONG

Taxonomy rules were the subject of more than one year’s intense lobbying by EU countries and industry.

The EU had planned to complete the rules on climate in 2020, according to its policymakers. Final results showed that the EU released a set of first rules on April 20, 2021, covering all sectors, including buildings. They also delayed the publication of gas and nuclear regulations until now.

These criteria were developed based upon the recommendations of expert advisors and are intended to meet science-based goals for combating climate change. However, some advisors claim that scientific criteria have been ignored in EU political fights over rules.

The most sensitive fuels are gas and nuclear. Innovated by the Commission in November 2020, the original fuels proposal excluded all gas plants that did not use emissions-capturing technology.

This was met with a backlash by countries like Poland and Bulgaria who believe that gas investment is necessary to replace more polluting coal. Some, like Denmark or Luxembourg, disagree with the idea of gas being labeled as a fossil fuel.

Gas plants can be considered as viable investments if they comply with certain conditions, such as a limit on CO2 emissions.

Is THAT IT?

No. It is still not complete.

An activity that is green must contribute substantially to at least one of the six objectives and not cause harm to any other. Two goals have been covered by the rules so far: Adapting to climate change and fighting climate changes. The criteria for all other areas will follow in the coming year.

A contentious EU decision regarding whether to classify agriculture (including intensive farming) as climate-friendly has been delayed by the EU until later in the year.

Brussels also has plans to expand the system. Another option would be a listing of pollution activities to require financial product providers to identify “unsustainable” investments.