There has been a growing interest in sustainable investing in recent years. More and more people have become aware of the impact of financial decisions on the environment. According to the Global Sustainable Investment Alliance, sustainable investment assets reached a record high of $40.5 trillion in 2020, representing a 27% increase from the previous year (GSIA, 2020). This trend is expected to continue as more investors seek to align their financial decisions with their values and make a positive impact on the environment.
To create security for investors and protect private investors from greenwashing, several countries worldwide have established or are on a way to create a classification system with a list of environmentally sustainable economic activities. This, so called, green taxonomy enables evaluating the sustainability of investments and helps investors make informed decisions about where to allocate their money.
In the European Union, taxonomy regulation is connected with the 6 EU environmental objectives:
- Climate change mitigation,
- Climate change adaptation,
- Sustainable use and protection of water and marine resources,
- Transition to the circular economy,
- Pollution prevention and control, and
- Protection and restoration of biodiversity and ecosystems.
The EU taxonomy also sets four requirements to be met by economic activity in order to be taxonomy oriented:
- Making a substantial contribution to at least one environmental objective,
- Doing no significant harm to any other environmental objective,
- Complying with minimum safeguards,
- Complying with the technical screening criteria.
The current state of green taxonomy
There are a number of organizations and initiatives working to promote green taxonomy and encourage sustainable investing. In the European Union, the proposed framework for green taxonomy is part of the European Green Deal. The United Nations has established the Principles for Responsible Investment (PRI) to encourage sustainable investing. A number of private firms, such as Celsia, EcoBio, MSCI and S&P Global, already offer green taxonomy services to help investors assess the sustainability of financial products.
Despite many efforts, there is currently still a lack of standardization. That makes it difficult for investors to compare products and make informed decisions, and also makes it difficult for regulators to enforce rules and guidelines related to green taxonomy. Luckily, many taxonomies are already in the final develomental stages.
This year, annual reports are expected to be published in February and March, so the first indications of how companies disclose their alignment will be known. It will become more clear which inconsistencies there are, for example, in the interpretation of the technical criteria for verifying a substantial contribution (Rambol 2023).
The EU has already finalized the Climate Delegated Act, covering the technical criteria for contribution to climate change mitigation and adaptation. This year, the EU published a draft version of the Environmental Delegated Act and opened it to public feedback. This act will include all the activities that can make a substantial contribution to the remaining four environmental objectives. It is planned to be finalised and adopted early next year.
To help users to easily navigate through the EU taxonomy contents, the EC created an IT tool – the taxonomy compass. In October 2022, the document titled Supplementary: Methodology and Technical Screening Criteria was published, revising the technical screening criteria for eligible activities in the transport sector included in the Climate Delegated Act.
Green taxonomy in the Value Chain Generator (VCG.ai)
Green taxonomy will play an important part also in value chains’ generation in the scope of circular bioeconomy. It will enable improved sustainability and informed decision-making that will support low-carbon and circular practices.
By realising the environmental impact of different stages of the value chain, VCG.ai will be able to find the most sustainable connections in the bio-based materials’ value chains. This would include identifying ways to reduce greenhouse gas emissions, conserving water resources, or minimizing waste. Such information would help investors make informed decisions about where to allocate their money to make a positive impact on the environment. In return, VCG.ai could be a great support for Green taxonomy’s main objectives, helping the companies to comply with the necessary requirements. Such an approach can help to reduce the environmental impact of economic activities and support the transition to a more sustainable future.
Green taxonomy is an important tool for sustainable investing, helping investors to align their financial decisions with environmental goals and make a positive impact on the environment. By providing a clear and transparent way for investors to evaluate the sustainability of financial products, green taxonomy can help to incentivize sustainable practices and support the transition to a low-carbon economy.
However, to ensure the widespread adoption of green taxonomy and maximize its potential benefits, it is important to address the challenges and barriers that currently exist. This includes developing and adopting common definitions and standards, improving the availability and quality of data on the environmental impact of financial products, and creating a supportive regulatory environment for sustainable investing.
By addressing these challenges and barriers, we can ensure that green taxonomy is used effectively to drive the transition to a more sustainable future. By promoting the adoption of green taxonomy, we can help to align financial markets with environmental goals and encourage more sustainable practices, ultimately contributing to a more sustainable and low-carbon economy.
Relevant links for the Green Taxonomy application
- EU platform on Sustainable Finance – Methodology and Technical Screening Criteria
- EU Taxonomy: A practical guide for navigating troubled waters
- EU taxonomy compass
- Delegated Act on the climate objectives
- Complementary Climate Delegated Act
- EU taxonomy info
- Global Sustainable Investment Alliance. (2020). 2020 Global Sustainable Investment Review. https://www.gsi-alliance.org/wp-content/uploads/2020/09/2020_GSIA_Review.pdf
- Organisation for Economic Cooperation and Development. (2021). OECD Principles for Green Taxonomy. https://www.oecd.org/environment/policy-background/oecd-principles-for-green-taxonomy.pdf