Sustainable investments: what the EU taxonomy is all about

What exactly does taxonomy mean? How should it be implemented? And why is the classification of nuclear power and gas as sustainable energy sources so controversial? Answers to the most important questions.

What is taxonomy?

According to the word taxonomy only means the classification into a certain system. The EU taxonomy is specifically about categorizing financial products according to their sustainability.

Companies can get up to 100 points – depending on how well they are in line with the taxonomy. In this way, EU citizens and investors should receive precise information about which economic activities are also sustainable.

Why is an EU taxonomy necessary?

The EU wants to become climate neutral by 2050. The EU Commission estimates that around 350 billion euros will be needed for this. The taxonomy is intended to help investors invest their money more in environmentally and climate-friendly sectors of the economy.

The taxonomy is currently planned primarily for private investors. But the EU Commission or individual member states could also use them as guides for budgetary expenditure. Even the European Central Bank could use the taxonomy to assess the conditions under which it makes money available to banks.

What are the criticisms of the taxonomy?

So far there have been many different labels for sustainable investments. With the uniform classification at EU level, greenwashing should actually be avoided – i.e. the incorrect identification of harmful products as climate-friendly.

However, scientists, environmentalists and some investors are now criticizing that the taxonomy promotes greenwashing rather than preventing it. This is mainly because gas and nuclear power are to be included as climate-friendly energy sources.

Why should gas and nuclear power be considered climate-friendly?

Both energy sources are seen as “bridging technologies” on the way to a sustainable energy supply because they emit fewer greenhouse gases than coal power.

However, gas power plants also emit a lot of CO2. In the case of nuclear power, the storage of waste materials is considered to be particularly problematic.

The taxonomy places certain conditions on the classification of gas and nuclear power as climate-friendly:

How do the individual EU countries feel about the Brussels plans?

Countries like France and Poland hope that the taxonomy will generate more private capital for the construction of nuclear power plants. Germany, on the other hand, opposes investment in nuclear power on the grounds that it is clearly unsustainable as an energy source. However, the federal government supports a green label for gas with the argument that it is used as a “bridging technology” and wants to promote the expansion of the gas infrastructure.

A Spanish-led group of EU countries, in turn, is firmly opposed to green-labeled investments in either energy source. Spain’s position is supported by Austria, Denmark and Luxembourg.

What’s next for the taxonomy?

After the EU Commission passed the regulation today, the EU states and the European Parliament have four months to reject the proposal. This requires a majority in parliament or at least 20 member countries, which together represent 65 percent of the EU population, have to join forces. If there is no majority against, the regulation will automatically come into force.

However, Austria and Luxembourg have already threatened to take legal action against the taxonomy before the European Court of Justice. Legal experts at the Center for European Politics believe that such a lawsuit could be successful. The Commission is possibly exceeding its powers with the regulation.