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Let’s talk about Taxonomy

To paraphrase or even mis-quote Benjamin Franklin, there are only three things certain in this world: life, death and Taxonomy. The UK Government is due, perhaps even this week, to consult on the first two environmental objectives of the UK Taxonomy: Climate Change Mitigation and Climate Change Adaptation.

At this point, we should probably define what is meant by Green Finance Taxonomy. The Taxonomy is a common framework that sets out a clear understanding of which activities can be classified as sustainable, in order to help support investment in sustainable projects by allowing investors to make informed choices. In anticipation of this consultation, let’s talk Taxonomy and consider what has recently been happening at the European Union (EU) Level.

The EU Taxonomy

The EU Taxonomy was meant to be the green investment rulebook for Europe and so – as explained above – aims to increase investor confidence in assets and activities that may be classified as sustainable. The EU’s Net Zero transition will of course require a large amount of private investment over the coming years. As such, the EU Taxonomy aims to help clamp down on ‘greenwashing’ by setting-out clear standards on which economic activities can be classified as green, so directing investment into activities that can be defined as environmentally sustainable.

So, why has this been controversial in the EU?

On 6th July, a majority of Members of the European Parliament voted against a motion to exclude gas and nuclear activities from the EU Taxonomy. The vote followed what can only be described as a major split across the EU, incorporating Member States, activist groups and think tanks, sparked by the European Commission’s publication of the Complementary Delegated Act (CDA) at the end of last year. In the CDA, the Commission proposed to label certain nuclear and gas activities as transitional – and thus fit for inclusion in the EU Taxonomy. Despite receiving the thumbs-up from evidenced-based assessments for nuclear by the EU Joint Research Centre, reviewed further by two expert bodies, the CDA was met by debate and backlash across Europe. For these critics, the proposed inclusion of gas and nuclear signalled a weakening of the Taxonomy, as well as of Europe’s climate credibility and leadership. 

What does this mean for EU markets?

Since the scrutiny period is now over without any objections from the European Council, the CDA will come into force and apply as of 1st January 2023 – thus sending a clear endorsement of certain nuclear and gas activities to the financial community.
However, a number of Member States, including Luxembourg and Austria, as well as campaign groups like as Greenpeace, have threatened to take legal action against the European Commission. They believe that the Taxonomy undermines the EU’s aspiration to be a climate front-runner, further pointing out that even China and Russia do not include gas in their national taxonomies and claiming that the decision risks strengthening Russia’s hold over Europe when it comes to gas and uranium supplies. 

On the opposite side of the argument, others claim this decision as a victory for science – stating that transitional gas and nuclear are necessary to support the deployment of renewables and other low-carbon technologies. Wherever your opinion lies, it is clear that the Taxonomy has split the EU.

And, what about the UK Taxonomy?

Evidently, sustainable finance has been a controversial subject at EU level, and the recent decision has been closely watched across the globe as countries consider their own sustainable investment rules. As a result, some key questions for the UK have emerged: how can these issues be dealt with during the development of our own Taxonomy, and what lessons can we learn from the EU?

Green finance will be an extremely important policy in attracting the right amount of investment in the right places and facilitating our transition to a Net Zero economy. We trust that the UK Taxonomy will reflect recent Governmental publications such as the British Energy Security Strategy, and hope the process runs more smoothly than the experience of our neighbours across the Channel. Energy UK looks forward to working with both industry and the Government in the development of our Taxonomy over the coming months and years.