Sustainability Policies

What is the EU Taxonomy regulation & how to become compliant

December 15, 2021

The EU Taxonomy regulation is a classification system designed to direct investments towards sustainable projects. It was published in June 2020 and will have a significant impact on the climate strategies of corporates and institutions.

From January 2022, financial market participants are required to report how and to what extent their financial products are EU Taxonomy compliant. Also, significant capital market-oriented companies and credit institutions, and insurance companies are subject to additional disclosure requirements.

OVERVIEW

  • What is the EU Taxonomy?
  • Which industries does the EU Taxonomy address?
  • How to become EU Taxonomy compliant?
  • Conclusion

The EU Taxonomy directive sets various criteria for investors for evaluating how sustainable the business activities are. Capital markets will increasingly require a solid sustainability reporting of corporates to differentiate between green and green washed investments.

Use our platform RE Wave to find the right solution for your corporate‘s sustainability strategy.

What is the EU Taxonomy?

After the Paris agreement on climate change, now the EU Taxonomy comes with objectives for companies and institutions. Sustainable economic activities must contribute to one of these six environmental objectives:

  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 ecosystems

One substantial contribution to one objective must not harm any other intent. The EU Taxonomy aims to provide transparency on what a sustainable activity intends to direct capital flows towards sustainable investments.

As a result, the regulation will directly impact institutional activities with regard to their climate strategies. In the future, corporates will be exposed to increasing pressure, not only from politicians but above all from the capital market. E.g. from investors who will focus more and more on sustainable investments.

The venture capital company Acton Capital Partners, for example, has committed to only engaging with companies that act in pursuit of sustainable growth. In 2020, Acton Capital joined forces with 20 leading European venture capital firms to develop a sustainability clause. This initiative is supposed to commit all newly financed companies to take climate action to become CO2 neutral.

Learn more about EU Taxonomy policy in this SustaiNews video

Which industries does the EU Taxonomy address and in which way?

Chart 1 - Industrial Sectors with greatestshare of GHG Emissions, targeted by the EU Taxonomy
Source: oecd-ilibrary

The EU Taxonomy focuses on those economic activities that contribute the most to greenhouse gas (GHG) emissions. Those activities were already prioritized according to their contribution to greenhouse gas emissions in 2017. More actions may be added to the EU green Taxonomy in the future.

So far, a variety of industries are covered by the regulation. These industries were classified according to NACE. Thich is a categorization of economic activities in the European Union (EU), derived from the French Nomenclature statistique des activités économiques dans la Communauté européenne.

According to the EU Taxonomy directive, about 90 % of the industries are responsible for greenhouse gas emissions in continental Europe. The chart below shows the industrial sectors with the largest share of emissions.

As Chart 1 shows, the energy, manufacturing, and transportation & storage sectors are the most prominent emission sources. They constitute close to 70 % of the total carbon emissions.

However, the NACE categorization has a downside. Activities of companies outside the EU are difficult to classify according to this classification system. Also, some sectors with high emissions levels, like the paper industry, are not considered. Thus, there is still room for improvement in the EU esg taxonomy.

For the individual industry sectors, the taxonomy specifies so-called threshold values. These indicate how many tons of carbon emissions per ton of manufactured product a company can produce.

Table 1 - EU Taxonomy Emission Thresholds
Selected Categories of Manufacturing Sector, as of February 2020

Source: oecd-ilibrary

Table 1 shows the taxonomy thresholds specified for the manufacturing sector and some of its sub classifications according to NACE.

As an example, the threshold value for aluminum manufacturing is 1.51 t/CO2/t. This means that one ton of manufactured product may produce a maximum of 1.51 tons of CO2.

The consequences for a company if its CO2 value lies above its sector’s threshold is not specified in the EU Taxonomy regulation. E.g. the aluminum division of the Norwegian aluminum manufacturer Norsk Hydro had an emission value of 2.24 tCO2/t product (according to its 2020 sustainability report). It thus exceeded the threshold set by the regulation. However, under the current version of the EU Taxonomy, the company does not have to be concerned about any severe consequences.

How to become EU Taxonomy compliant?

A company has various options to reduce its CO2 emissions, significantly the Scope 2 ones, and become EU Taxonomy compliant. Using clean energy is essential, in our previous blog, Four ways to reduce your carbon footprints, we introduced the powerful instruments to become carbon neutral. These include Energy Attribute Certificates (EACs), Green Tariffs, Power Purchase Agreements (PPAs) and Direct Investments.

Of the four methods presented in our previous blog, PPAs are among the most sustainable and credible instruments to source green electricity. This method also helps you to become EU Taxonomy compliant without investing directly in renewable energy assets. Moreover, PPAs are an excellent measure for corporates to hedge against rising electricity prices in the long term.

Data on PPA volumes contracted in 2020 in Europe suggests that demand for PPAs remains strong and has not suffered from the COVID 19 pandemic.  

PPAs bring along various benefits, including long-term price stability and risk mitigation in power sales and purchases. For energy sellers and developers, they are an excellent opportunity to finance their renewable energy assets. For energy buyers, PPAs are a sustainable way to reduce their carbon footprint, become EU Taxonomy compliant, and make their brand more sustainable and greener.

The positive qualities of PPAs have also been recognized by the European Commission (EC), which wants national governments to promote these long-term agreements. The Amendment to the Renewable Energy Directive, sets out measures to foster the deployment of Power Purchase Agreements in the EU member states. This was published by the European Commission on July 14, 2021

These measures include guidelines for member states to reduce administrative burden and financial support for small and medium-sized companies. EU member states are also required to minimize any undue barriers. At the same time, the EC aims at strengthening the regulatory measures on PPAs for the benefit of consumers and producers of renewable electricity.

The EC’s amendment has to be agreed upon by the European Parliament and the EU Council of Ministers. This needs to happen before binding and being integrated into national legislation in the member states. However, such legislation on the part of the EU would undoubtedly mean a further push for PPAs whose trend is already pointing upwards.

Conclusion

The EU Taxonomy Regulation will undoubtedly increase the pressure on corporates to reduce their CO2 emissions and become carbon neutral. Power Purchase Agreements are a suitable solution for companies to reach their climate targets and become EU Taxonomy compliant.

We at Think RE support you in finding the right solution for your corporate‘s sustainability strategy. Register now and get access to our free tools on our renewable energy platform RE Wave.

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