The EU Taxonomy for sustainable activities
The taxonomy is a key part of the EU Sustainable Finance Action plan, a landmark strategy aiming to contribute to the bloc reaching its European Green Deal targets of transforming the EU into a net zero emitter by 2050. In this article you can read about the taxonomy and how it is likely to affect municipal activities and investments.
The taxonomy is the EUs new classification system for sustainable economic activities. It has been developed in response to the ever-increasing number of various definitions and labels in the market. With the taxonomy, the European Commission aims to create a unified definition of a sustainable activity. This will in turn enable capital to more easily flow to activities which undoubtably have net positive climate and/or environmental impact.
The EU defines six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
Do no significant harm
In order for an activity to be considered as sustainable according to the taxonomy, it must contribute substantially to at least one of the environmental objectives above, defined by technical screening criteria. In addition, the activity must “Do no significant harm” towards the remaining five objectives, and comply with minimum social safeguards (UN Guiding Principles including ILO core conventions and OECD guidelines).
For example: an activity which alters a river course so that residential areas are not flooded may seem positive from a climate change adaptation perspective but will not count as sustainable according to the taxonomy if the same activity worsens living conditions for fish, or if the labour is done in violation of basic regulations.
The Do No Significant Harm (DNSH)-criteria are often the most difficult set of criteria to prove compliance with. For instance, the Technical screening criteria for climate change mitigation of new buildings requires that a building has a 10% lower energy demand than the national NZEB (nearly-zero energy building) requirements. Among the DNSH requirements, however, we also find detailed requirements towards risk analyses, waste recovery rates from the construction site and water consumption in showers, toilets and urinals.
Not a complete encyclopaedia
The taxonomy is structured according to the NACE system for statistical classification of economic activities, already is use in many other contexts in the EU and Europe. However, it can be challenging to navigate in the taxonomy as there is not necessarily a 1:1 match between a (municipal) project and an economic activity as it is defined in the taxonomy. Neither is it complete - the EU's technical expert group has focused on the most emission-intensive activities, so not all conceivable activities can be found in the taxonomy.
Will the taxonomy apply in Norway?
The taxonomy is first and foremost a list of criteria that must be met in order for an activity to be considered sustainable. This list, as well as other provisions, are proposed to be incorporated into Norwegian law via the EEA Agreement through a new sustainable finance law. In addition, some large companies must include information in their regular reporting on the proportion of the company's activities that are associated with activities that are sustainable according to the taxonomy. Financial undertakings that conduct portfolio management and financial advisers are also required to inform customers about how sustainability risk is integrated in risk assessments and investment advice, and about any negative effects of the investment decisions.
In the EU, regulations will likely apply from 2023. It is still unclear when incorporation into Norwegian law will take place.
Regardless of regulatory processes, it is reasonable to assume that the taxonomy will be the "gold standard" in green and sustainable finance, and it will be a benchmark against which both investors and supervisory authorities will assess both financial and non-financial institutions.
What impact will the taxonomy have on municipal investments?
Many are wondering how local and regional authorities will be influenced by the taxonomy. At the present stage there are no definite answers, however it is likely that the following areas will be impacted:
Access to green funding
Institutions which offer green funding, such as KBN, may consider adjusting their criteria and documentation requirements in order to achieve an increased degree of compliance with the taxonomy.
Public tenders and procurements
The taxonomy can be a useful tool in the design of tenders and requirements specifications, e.g., within the transportation or water and wastewater sectors.
Access to EU funding
The EU has signalled that several of their programs will to some extent be linked to the taxonomy. This can relate to criteria for receiving financial support, or to reporting on the environmental impact of projects which have received funding.
For example, references to the DNSH principle will be included in the application form for several research windows under the Horizon Europe 2021-2027 programme, and InvestEU, the EU's programme for triggering socio-economically profitable investments in innovative and sustainable business, proposes a "Sustainability proofing" which is somewhat based on the taxonomy.
Local business life and local services
Depending on sector and size, local businesses, especially companies which export to the EU, may meet increasing demands and expectations of how their activities measure against the taxonomy. Those who are early in adapting and reporting can therefore gain a competitive advantage.
Local businesses may rely on functioning cooperation with local authorities, such as the municipalities, if they want to successfully make use of the taxonomy. Under the DNSH requirements, for instance, reference is often made to risk and vulnerability analyses (for example under the criteria for fire protection or flood prevention), which in Norway are administered by the municipalities and county authorities.
KBN and the taxonomy
KBN offers discounted, green loans for climate-friendly investments in the municipal sector. Every year, we publish a report in which we describe the projects that have been awarded green loans, and calculate the environmental impact of these. In 2020, we for the first time mapped how the green loans performed against the technical screening criteria (i.e., the exercise did not include the Do No Significant Harm criteria). The exercise revealed that 9% of KBN's green project portfolio appears to be in accordance with the technical criteria in the taxonomy, while 59% is considered to «likely align». The complete mapping can be downloaded as a spreadsheet.
 More specifically, the Primary Energy Demand (PED) must be 10% lower than national NZEB requirements. Please note, however, that there are currently no Norwegian NZEB in force.
 The version of the taxonomy that was available at the time of reporting - this has since been updated.