Member states of the EU Council have approved the EU Taxonomy Climate Delegated Act today, enabling the regulation to take effect as of January 1, 2022, and marking a significant milestone in providing transparency to companies and investors.

The EU Taxonomy is part of the EU Action Plan on Sustainable Finance, established by the EU Technical Expert Group on Sustainable Finance’s (EU TEG). The taxonomy is a classification system enabling the categorization of economic activities that play key roles in contributing to at least one of six defined environmental objectives, and no significant harm done to the other objectives. The six objectives include climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.

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With the first delegated act approved today, the first two climate objectives will enter into implementation at the start of next year, enabling companies to begin reporting against the taxonomy, and for investors and financial market participants to prepare for upcoming SFDR disclosure requirements.

While the taxonomy regulation has been cleared to enter into law, the classification of some activities remains unclear. Specifically, the use of fossil-based natural gas as a transition fuel and nuclear energy as a clean energy source remain controversial. The act indicates that the assessment of nuclear energy as “climate neutral energy” is still ongoing, and that specific legislation relating to natural gas is being considered.

In a statement Fiona Reynolds, CEO of the PRI said:

“The adoption of the first set of EU Taxonomy criteria is a significant achievement, as it sets into law for the first time a common understanding of which and to what extent activities covered are environmentally sustainable. It is now crucial that the EU Taxonomy technical screening criteria remain based on the best available scientific evidence. PRI will be attentive to a possible second delegated act that could cover nuclear energy and gas-fired power. Any proposal from the European Commission should consider investors need for objective criteria. Recognising activities that have a role in the transition, for example via an extension to the EU Sustainable Taxonomy, should be prioritised by EU policymakers.”

Sustainable investment association Eurosif also welcomed the adoption of the taxonomy regulation, while maintaining its stance that nuclear energy and natural gas should remain outside of the system’s clean energy classification in order for the EU’s sustainable finance agenda to retain credibility. In a statement following the adoption, Eurosif said:

“As Eurosif has already stated, inclusion of natural gas and nuclear energy would change the nature of the EU Taxonomy from a list of sustainable activities to a list of transitional activities. Even if these sectors may be needed in the short-term to secure energy supply, they will play a limited role in the energy transition in the longer term as pointed out by the IEA in its 2050 Net-Zero roadmap. Therefore, our view remains that they should ideally not be included in the Taxonomy as sustainable economic activities.”