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EU Taxonomy on sustainable economic activities – preliminary assessment of the implications for corporate energy efficiency investments

Panel: 5. Business models, finance and investment

This is a peer-reviewed paper.

Author:
Bettina Dorendorf, KfW Bankengruppe, Germany

Abstract

Transforming the economy to achieve the goals of the Paris Agreement and for this purpose pursuing a carbon neutral economy in 2050 requires an additional yearly investment volume in the range of EUR 175 to 290 bn per year according to estimations of UNEP FI. (1)

The EU Action Plan on Financing Sustainable Growth, adopted in March 2018, pursues inter alia the increase of direct capital flows towards sustainable investments, of which corporate and industrial energy efficiency investments are a part of.

However, so far there is no clear and widely accepted definition what the term “sustainable” means in this context. An important step in this direction is a new regulation which establishes a framework to facilitate sustainable investments. The Taxonomy Regulation, part of the EU Action Plan, forms the basis for a classification system by determining clear criteria under which an economic activity can be considered “green” in the sense of ecologically sustainable (referred to as “taxonomy” or “EU taxonomy”). (2)

For this purpose, the EU taxonomy defines specific quantitative and qualitative criteria (metrics, thresholds and do no significant harm-criteria). Their application will be binding for those providers of investment products which claim their products are sustainable (creating transparency) as well as for large corporates in respect to their non-financial reporting.

A Technical Expert Group (TEG), created to assist the EU Commission in defining the technical criteria for the taxonomy, has distinguished 70 economic activities and has defined for each of them the specific conditions which have to be met in order to consider an economic activity ecologically sustainable.

This peer reviewed paper will describe the main elements of the EU taxonomy for sustainable economic activities and make a preliminary assessment of the impact on corporate energy efficiency investments based on the example of the renovation of a production facility (non-residential building). It will point out the need for action for the corporate sector and discuss the main challenges for corporate energy efficiency investments to comply with the taxonomy requirements.

Disclaimer: at time of writing, the EU Taxonomy Regulation has not yet been fully adopted (expected 1st half 2020. Also, the Delegated Act with the final version of the technical screening criteria has not yet been published (expected for end of 2020). However, fundamental changes with regard to methodological approach and scope are not expected.

(1) United Nations Environment Program Finance Initiative.

(2) In this paper, the term “taxonomy” or “EU taxonomy” relates to the Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment, and amending Regulation 2019/2088 on sustainability- related disclosures in the financial services sector(2018/0178(COD), as adopted by the European Council on 15.4.2020.

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