What’s green and what’s not?

Whether an economic activity is environmentally sustainable can be a hard question to answer, just as it can be difficult to decide whether a food or consumer product on the supermarket shelves is really healthy, but it is a question to which many investors want answers.

In December, the EU took a major step forward in providing greater clarity around the issue when the European Council and the European Parliament reached agreement on the world’s first-ever ‘green list’ classification system for sustainable economic activities, known as a taxonomy.

The aim is to provide clear criteria for which economic activities are genuinely green, thereby allowing investors and consumers to make well-informed choices about which economic activities and companies they wish to support.

Principled framework

The agreement reached does not yet provide a definitive list of activities, but defines a framework of principles.

For example, to be green an economic activity must contribute substantially to the EU’s environmental objectives and comply with robust, science-based criteria and minimum social and governance safeguards. Additionally, an activity must clearly not harm any of the EU’s environmental and climate change objectives.

These objectives are listed as: climate change mitigation and adaptation, sustainable use of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. 

Next steps                                           

The next steps are for the EU’s Technical Export Group to finalise its recommendations of economic activities that should appear in the green list, which will then be scrutinised for adoption.

Some of these decisions will be easy, for example listing wind or solar power generation, but others are more complex, such as the inclusion of natural gas-based activities or nuclear power. The agreement specifically excludes power generation activities from solid fossil fuels.

The list will evolve as companies are allowed to submit economic activities for consideration and come into full effect one year after two acts have been passed into legislation at the European level, one on the climate-related objectives and the other on the environmental objectives. This should provide time for companies to familiarise themselves with the green list’s criteria.

The timetable is for the European Commission to adopt the act on climate change objectives by the end of 2020 and the one on environmental objectives by the end of 2021, which would mean that the green taxonomy would go into effect from January 1, 2023. 

Company disclosure

EU member states, the EU itself, financial companies and around 6,000 large companies and groups across the EU will have to abide by the new rules, although there is no barrier to any other company or entity participating. The EU hopes that many will do so to highlight genuinely sustainable businesses in order to attract sales and investment.

Companies will have to disclose information as to how an activity meets the criteria of the taxonomy regulation and will be able to publish the percentage of their turnover or investments which are in line with the list of environmentally-sustainable activities.

Improved transparency should help funnel private sector funds into green investments, helping to put the EU on the path to meeting its net zero carbon goal by 2050.