EU Taxonomy: Scope for ‘Amber’ Classification?
The Platform on Sustainable Finance has published its Extended Environmental Taxonomy: Final Report on Taxonomy extension options supporting a sustainable transition (29 March) in response to the Commission’s request for advice on possible extensions to the EU Taxonomy.
The EU Taxonomy is a classification system, established under the EU Taxonomy Regulation, to identify economic activities that make a “substantial contribution” to at least one of six environmental objectives while ensuring that the activity will “do no significant harm” (“DNSH”) to any of the other objectives and also meet minimum safeguards. Activities with a level of performance meeting the relevant technical screening criteria thresholds for “substantial contribution” and DNSH are referred to as Taxonomy-aligned or “green”.
The Commission has previously noted that the Taxonomy covers activities that are both “green” and sustainable but that activities that are not “green” are not necessarily unsustainable. The Platform identifies a “high risk of misinterpretation and misunderstanding” about the space between substantial contribution and significant harm and therefore recommends extending the EU Taxonomy framework to possibly recognise economic activities in the “middle space of environmental performance”.
The report considers the issues and options for and against and ultimately recommends extending the EU Taxonomy “beyond green” to classify a wider range of economic activities based on a traffic-light system:
- Green (Substantial Contribution): Activities already included in the green Taxonomy under the Climate Delegated Act or to be included in future delegated acts.
- Red (Significantly Harmful):
- Always significantly harmful – unsustainable activities which cannot be improved to avoid significant harm and where urgent, managed exit or decommissioning is required; and
- Urgent transition needed – unsustainable activities that could qualify for Taxonomy-recognised investment as part of a transition plan to avoid their current significantly harmful performance.
- Amber (Intermediate Performance): Activities that operate between significantly harmful and substantial contribution performance levels and could qualify for Taxonomy-recognised investment as part of an intermediate/amber transition plan under which they continue to improve performance away from significantly harmful.
- Low Environmental Impact – activities that do not have a significant environmental impact and should not be regarded as red, amber or green.
The Commission will now analyse the advice from the Platform as set out in the report.
The Platform considers the balance of arguments to be in favour of an extended environmental Taxonomy, which would introduce greater transparency and clarity for investors and ensure market practices are aligned across the EU.