EU Taxonomy Rules for Climate Approved for Implementation in January 2022

The EU Council has approved the EU Taxonomy Climate Delegated Act. Thus, the regulation to take effect as of January 1, 2022, marking a significant milestone in providing ESG transparency to companies and investors.

The EU Taxonomy is part of the EU Action Plan on Sustainable Finance, established by the EU Technical Expert Group on Sustainable Finance. The taxonomy is a classification system enabling the categorization of economic activities that play key roles in contributing to at least one of six defined environmental objectives, and no significant harm done to the other objectives. The six objectives include climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.

With the above-mentioned delegated act approved, the first two climate objectives will enter into implementation at the start of next year. It enables companies to begin reporting against the taxonomy, and for investors and financial market participants to prepare for Sustainable Finance Disclosure Regulation disclosure requirements.

But the classification of some activities remains unclear. Specifically, the use of fossil-based natural gas as a transition fuel and nuclear energy as a clean energy source remain controversial. The act indicates that the assessment of nuclear energy as “climate neutral energy” is still ongoing, and that specific legislation relating to natural gas is being considered.