In this article you can read about the taxonomy and how it is likely to affect municipal activities and investments.
The taxonomy is the EU's new classification system for sustainable economic activity. The backdrop is both a strong need to manage capital in the direction of sustainable activities in order to speed up the transition, as well as a steady increase in greenwashing and various definitions and labels within sustainability.
With the taxonomy, the European Commission wants once and for all to create a concrete and agreed definition of what is needed for an activity to be considered sustainable, so that both investors and consumers can be sure.
The taxonomy is built around 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
For an activity to be considered sustainable according to the taxonomy, it must be proven that it contributes positively to at least one of the goals above. How you contribute positively is not up to you to define yourself - you must meet so-called technical screening criteria described in the taxonomy.
Do no significant harm
One of the most important characteristics of the taxonomy is the holistic perspective on sustainability. In addition to contributing positively to one of the six environmental goals, one must prove that one does not cause significant damage to any of the other five goals.
In addition, a minimum of requirements for social conditions must be met, these are key ILO conventions, the UN's guiding principles for business and human rights and the OECD's guidelines for multinational enterprises.
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 the activity 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.
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.
Does 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, has already been incorporated into Norwegian law through the EEA agreement in a new law on sustainable finance.
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 companies that carry out portfolio management and financial advisers are also required through related legal acts to inform customers about how the consideration of sustainability risk is integrated into risk assessments and investment advice, and about any negative effects of the investment decisions.
What does the EU taxonomy mean for 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:
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.
Certification and labeling schemes used by municipalities and counties may adjust their requirements to better fit the taxonomy. For example, BREEAM 6.0 and the Nordic Swan Ecolabel for new buildings are adapted to the taxonomy.
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.
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.
If a company is considering establishing itself in a municipality, and wants to be taxonomy-adapted, the taxonomy may appear in conversations about site selection and regulation. For new buildings, there is a requirement that these cannot be built on plots defined as agricultural land, cultivated land, forest, or area with an identified high biodiversity value or habitat for endangered species.
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.
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.
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 connection with this report, we map how our criteria for green loans compare to the criteria in the taxonomy. Complete mapping can be downloaded as a spreadsheet.
In addition, we continuously assess how our criteria for green loans should possibly be adapted to the taxonomy. We also have a dialogue with counties, municipalities and affected industries in order to mutually increase knowledge about the taxonomy in a Norwegian, local context.
