Implementation of the new European taxonomy: What are the next steps?

The European green finance taxonomy identifies which activities are environmentally sustainable. This classification now provides with clear, transparent information on the activities to which investors’ financial flows are directed.

This green share is expressed financially as a percentage of total sales, capital expenditure (CAPEX) and operating expenditure (OPEX). This new common language should enable private financial flows to be rapidly redirected towards projects that promote the ecological transition.

The European green finance taxonomy has applied to companies since January 2022. It currently covers 142 economic activities within 9 sectors and will radically transform the way companies define performance. This environmental compass has introduced precise specifications for determining whether an economic activity can be considered environmentally sustainable.

Back in 2018, the European Commission launched its “Financing Sustainable Growth” action plan comprising 10 priority measures. The first priority measure? Establishing a unified European classification system for sustainable activities.

Public finances do not have sufficient resources to act alone. Redirecting private financial flows to achieve environmental objectives is therefore necessary to the economic transition towards a sustainable model.

According to the European Court of Auditors, achieving the objective of the European Climate Law would require the mobilization of at least 1,000 billion euros of sustainable annual investment between 2020 and 2030.

On July 12, 2020, the so-called taxonomy regulation came into force. As a regulation is immediately applicable, this European taxonomy is incorporated uniformly and without transposition into the law of all member states.

From now on, the taxonomy will govern the market for so-called “green” financial products. The aim is to avoid greenwashing by ensuring that “green” investments are allocated to environmentally-friendly economic activities.

An activity can be qualified as green within the meaning of the taxonomy regulation if it meets the following conditions:

• • 1st condition. Contribute to at least 1 of the 6 environmental objectives below:
    • Mitigating climate change,
    • Adapting to climate change,
    • Sustainable use and protection of aquatic and maritime resources,
    • The transition to a circular economy,
    • Pollution prevention and control,
    • Protecting and restoring biodiversity and ecosystems.
  • 2nd condition. Not significantly affect any of the other 5 environmental objectives.
  • 3rd condition. Comply with the minimum guarantees of social law and the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work.

The European green finance taxonomy no longer allows for nuance. A series of delegated acts adopted by the European Commission provides the technical selection criteria for identifying and assessing which activities are eligible.

The transparency obligations associated with the European taxonomy for green finance are based on quantitative data. This involves publishing the green share of sales, capital expenditure and operating expenditure. Companies must also provide qualitative information. They must explain the nature of the eligible activities and how the technical criteria are assessed.

In June 2021, the European Commission published a first “Climate” delegated act.

This text introduced technical examination criteria to identify activities contributing to the first 2 environmental objectives.

These first criteria can be used to determine whether an economic activity makes a substantial contribution to mitigating and adapting to climate change.

In June 2023, the European Commission adopted its second “Environment” delegated act.

This text sets out the technical criteria for identifying economic activities that contribute to the 4 non-climate environmental objectives.

The Environment criteria can be used to determine whether an economic activity makes a substantial contribution to the sustainable use and protection of aquatic and maritime resources, the transition to a circular economy, pollution prevention and control, or the protection and restoration of biodiversity and ecosystems.

The two delegated acts cover the following sectors:

Firstly, energy production from solid fossil fuels is explicitly excluded from the taxonomy. Any energy source exceeding the threshold of 100g CO2e/kWh is also excluded.

Thus, the activity of generating electricity from a hydroelectric plant is considered sustainable if it meets one of the following criteria:

• • The power generation facility is a run-of-river plant with no artificial reservoir, or
  • The power density of the electricity-generating facility is greater than 5 W/m2, or
  • GHG emissions throughout the life cycle of a hydroelectric plant are less than 100 g CO2 equivalent/kWh.

No, of course not. The taxonomy regulation also defines so-called enabling activities. These enable activities other than their own to contribute to 1 of the 6 environmental objectives.

The taxonomy identifies several transitional activities in the energy sector. This is the case for these 2 activities: manufacturing batteries for electric vehicles, and building and operating hydrogen storage facilities.

The European green finance taxonomy also defines a class of so-called transitional activities. First of all, these activities do not yet have a technologically or economically feasible low-carbon alternative. In addition, their greenhouse gas emissions are well below the average for the sector. Last, they must not impede the development and deployment of low-carbon alternatives. Activities meeting these 3 criteria are eligible for the green taxonomy.

In February 2022, the European Commission adopted a delegated act which introduces the conditions necessary to include natural gas and nuclear in the taxonomy as transitional activities.

Taken after two years of technical discussions, this decision has given rise to much debate and contestation. However, the Commission believes that these sectors have a role to play in facilitating the transition to a model that favors renewable energies.

To qualify as transitional, gas-fired power plants must meet one of the following criteria:

• Emit less than 100g CO2e/kWh, or
• For power plants granted planning permission before December 31, 2030, a direct emissions threshold of up to 270g CO2e/kWh must be met, or an annual average of 550kg CO2e/kW over 20 years must not be exceeded.

For nuclear energy to qualify as transitional, the following conditions must be met:

1. Before 2040, power plants will have to validate extension work for existing reactors,
2. New power plants will have to have planning permission before 2045,
3. The member states must have a detailed plan for the commissioning of their high-level waste disposal facilities.

Non-financial companies subject to the NFRD have been subject to the taxonomy since January 1, 2022 . They have first published an eligibility analysis, presenting the correspondence between their activities and those included in the taxonomy.

As of January 1st 2023, these companies publish each year the alignment ratio of their activities with the taxonomy’s technical criteria.

Until then, only the technical criteria of the “Climate” delegated act had come into force.

On January 1st 2024, the “Environment” delegated act came into force, and the companies must use them.

January 1st 2024 also marks the application of the taxonomy regulation to non-financial companies meeting 2 of the following 3 criteria: more than 250 employees, sales of over 50 million euros or balance sheet total of over 25 million euros. The listed SMEs concerned must exceed at least two of the following three thresholds: have more than 10 employees, sales in excess of 875 k€ or total assets in excess of 437.5 k€.

On the one hand, the transparency obligations are based on quantitative data: share of sales, capital expenditure and operating expenditure. On the other, companies must provide qualitative information: nature of eligible activities, or the way in which technical criteria are assessed.

From January 1st 2022, finance companies have been required to publish the proportion of their assets invested in sustainable activities. The Green Asset Ratio (GAR) calculates the proportion of assets invested in sustainable economic activities according to the European Green Taxonomy classification. Calculating this new ratio represents a major challenge for credit institutions due to the lack of data.

A transition period has also been granted to financial companies. Thus, in 2023, they only published a ratio taking into account assets eligible for the taxonomy.

From January 1st 2024, financial companies are subject to the same obligations as non-financial companies. They will publish an annual GAR calculating the proportion of investments whose activities are aligned with the green taxonomy.

The communication from Stellantis, an international car manufacturer, is a good example of the application of the European taxonomy.

Stellantis uses the technical criterion of taxonomy for the low-carbon transportation technology manufacturing sector. This sector covers the manufacture, repair, maintenance, refurbishment, conversion and upgrading of low-carbon transport vehicles, rolling stock and ships. The taxonomy regulation classifies these activities as enabling activities.

In its 2022 annual report, the company has included a “Taxonomy Disclosure” section. As required by the taxonomy regulation, Stellantis details its calculation methods, its adherence to the “Do Not Significant Harm” principle and its compliance with minimum social law guarantees. In particular, Stellantis analyzes the proportion of its activities relating to electric and low-carbon vehicles.

In doing so, the company can state that in 2022, if 92.4% of its economic activities were eligible for the taxonomy, it considers that 7% of its sales were effectively aligned with the green classification. This represents 12.5 billion euros out of total sales of 179.5 billion euros.

Similarly, Stellantis estimates that in 2022, 99% of its capital expenditure was taxonomy-eligible, but only 22% of its CAPEX was taxonomy-aligned. This represents 2 billion euros out of a total CAPEX of 9 billion euros.

• The European taxonomy redefines sustainable investment and no longer allows for nuance.
• However, the need for a transition period for the greening of the energy mix, the economy in general and finance is accepted. The enabling and transitional function of certain activities enables them to meet other criteria, in order to qualify as green.
• The agricultural sector, which is largely absent, should also be the subject of a delegated act, the adoption of which will be just as complex as for gas and nuclear power.
• Companies have 2 years to adopt the taxonomy and demonstrate to their financial partners and shareholders whether their business model is green.
• At the same time, the European Union is working on a social taxonomy project to avoid social-washing.

At Positivéco, we see the new national and international regulations on CSR as an opportunity for positive growth.

Our aim: to apply financial and commercial skills to structure projects outside the traditional silos.

Since 2009, we have been supporting climate investment and development aid projects; we evaluate CSR policies and carry out extra-financial reporting for our clients. Positivéco advises financial institutions, public actors, listed and non-listed companies.

Make an appointment now and discover how you can meet the new CSR requirements while serving the company’s project.