Insights / 06 October 2020

Towards a greener future: a defence of the EU’s taxonomy laws

Freatured in Global Risk Regulator

The EU Taxonomy Regulation, which came into force in July 2020, necessitates that funds and asset managers can no longer label their products as sustainable without external validation. This will stop the ‘greenwashing’ of offerings and will set a precedent to create a more sustainable economy. 

The Taxonomy addresses six environmental objectives as laid out by the European Commission’s Technical Expert Group and aims to determine how far activities substantially contribute to climate change mitigation. NACE (Nomenclature of Economic Activities) codes are used to label and categorise sectors of the economy, in order to cover as many activities as possible. However, problems have arisen as, although they cover most, these codes don’t cover every sector of the economy.

However, while this may be a slight issue now, it likely won’t be in the future. These laws are incredibly flexible and built into them is a strong recommendation to make revisions and amendments on a regular basis. Furthermore, these laws represent a significant departure from ESG ratings, which have proved problematic as larger companies have often been able to obtain better ratings, even if they are having no positive environmental effect.

Firms will now be able to demonstrate how compliant they are with the EU Taxonomy laws, with the most sustainable being awarded the green label. Furthermore, with the addition that all firms, not just environmentally marketed firms, must declare their alignment in their marketing collateral, firms with good alignment should be able to attract more capital. 

Daniela Klasén-Martin recently had an article published in Global Risk Regulator, in which she explores the merits of the EU Taxonomy in attracting private capital into green investments as well as some of the challenges and considerations of the new laws, including the point of Brexit. Read the full article here.