🪴 Maixnor WU

EU Taxonomy Regulation

Nov 04, 20253 min read

General

  • goal is redirecting capital flows
    • targeting banks and other investors when giving out loans
  • 2 parts
    • SFDR for financial companies
    • NFRD for producing companies
  • does not need to be transposed → regulation
    • in effect since 2021
  • EU classifies what is green and what isn’t
  • have to separately report on
    • Revenue
    • CAPEX
    • OPEX
  • generates a percentage on how much money is used or made for/from green endeavors
    • problems:
      • perspectives change rapidly (e.g. is nuclear energy green or not?)
      • laws are slow to change (technological advancements may be too fast)
  • collecting data on all subsidiaries around the world
    • digital infrastructure

Incentives

  • since incentives are only in full (e.g. all of a plant is powered by hydrogen) the incentive if 100% coverage is not possible to just not indulge in it anyways
  • a razor blade separating into feasible and non-feasible options, no mix between them possible

Qualitative Reporting Requirements

  • accounting method
    • how was aligned Revenue/CAPEX/OPEX determined
  • double counting
    • methodology to avoid double counting
  • economic activities
    • explanation of relevant activities and weights
  • additional information
    • relevant background information

Taxonomy Table

  • for each of Revenue, CAPEX, OPEX a separate table
  • percentage of aligned/not aligned activities
  • EU 2020/852
      • delegated act 2021/2139 (objectives 1-2)
      • delegated act 2023/2485 (objectives 1-2)
      • delegated act 2023/2486 (objectives 3-6)
      • delegated act 2022/1214 (include nuclear and gas energy)
        • transitional only
  • official tools

Parents/Subsidiaries

  • each subsidiary large enough has to report on their own, even if included in parents consolidated report
  • subsidiaries not large enough to report on their own can be just included in parent company

Environmental Objectives (art 9)

  1. climate change mitigation
  2. climate change adoption → similar to E1 mandatory before 2024

mandatory after 2024 3. sustainable use and protection of water and marine resources → similar to E3 4. transition to a circular economy → similar to E5 5. pollution prevention and control → similar to E2 6. protection and restoration of biodiversity → similar to E4

What to do?

  • Taxonomy Eligibility: screening of economic activities

    • if it is listed, it can be aligned

  • substantial contribution

  • do no significant harm

  • minimum safeguards

  • = taxonomy alignment in % for each economic activities

  • then sum up alignments of activities by weight of economic expenditure

  • = total taxonomy alignment in %

    • for CAPEX/OPEX/Revenue separately (influences weights)

Shortcomings

  • political
    • some unsustainable practices deemed as sustainable and vice versa e.g. Germany and gas power generation
  • quite technical
  • only focus on environment
    • very little social or governance aspects
      • there are plans to integrate a social aspect as well
        • would include: decent work, adequate living standards, inclusive & sustainable societies
      • finalization not before 2025, probably later
  • minimal safeguards
  • does not prohibit unsustainable activities, only disclosure requirement
  • exhaustive list
    • economic activities can be missing → All Activities in an Economy - Sustainable View
    • e.g. company is reporting 50% not-aligned, 20% aligned, 30% not-eligible
      • 30% not eligible can be sustainable, but are not even included, because exhaustive list

Empirical Evidence

wontfix L5 15-18

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