EU Taxonomy: This is DNB’s spring report

The EU green agenda reaches an important milestone

An important milestone was reached when the European Commission published its first set of environmentally sustainable activities.

The EU Taxonomy has reached an important milestone on April 21st. Foto: DNB
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Publisert 07. mai 2021
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After a four months’ delay, the important milestone was reached on April 21st when the European Commission finally published its first set of delegated acts defining ‘environmentally sustainable activities’ as part of the EU Taxonomy regulation. Finding consensus around these definitions have proven difficult, but the EU has an ambitious agenda where the EU Taxonomy will be an important tool on its quest to become carbon neutral by 2050.   

In this article, we take a closer look at the political process leading up to the April publications, relevant changes compared to previous drafts, as well as what can be expected looking forward. The delegated acts published in April marks an important milestone, but there are many more steps to be taken before the full scope of the regulation is in place. 

EU Taxonomy: Classifying, and channelling capital to, sustainable activities

The EU is targeting a 55% reduction in carbon from 1990 to 2030, and carbon neutrality by 2050. Reaching these targets will require that vast amounts of capital, both public and private, are invested in a greener direction. 

To achieve this, we first of all need a common understanding and clear definitions of what economic activities can be considered ‘environmentally sustainable’. This is where the EU Taxonomy comes in. The purpose is to weed out greenwashing and create a trustworthy and attractive investor market. The financial sector is key to bridging the financial gap and secure green transition.

How does the EU Taxonomy work?


  1. For an activity to be considered environmentally sustainable, there are three layers of criteria. Firstly, the activity must substantially contribute to atleast one of the EU’s six environmental objectives (see figure).
  2. Secondly, the activity must not significantly harm any of the other environmental objectives.
  3. Thirdly, the activity must comply with minimum social safeguards such as UN Guiding Principles, OECD guidelines, and ILO conventions. 

For more information on the background and purpose, see our Webinar from October 2020.


EU Taxonomy Foto: DNB

The political process leading up to April 2021 

The political agreement on the EU Taxonomy was made already back in December 2019 and the level 1 legislative framework entered into force in July 2020. Still, we had to wait until April 2021 for the European Commission to adopt the first parts of the level 2 legislative framework, the ‘delegated acts’ for the first two out of the six environmental objectives. 

The process has not been smooth sailing – as one can expect when it comes to finding consensus around a definition of “environmental sustainability”. The draft delegated acts published by the European Commission in November 2020 stirred quite a debate. Although to a large extent based on the final proposal published the European Commission’s Technical Expert Group (TEG) back in March 2020, it was probably first with the formal draft in November that the message reached more broadly and the possible implications began to sink in. Of course, in March 2020, the pandemic also swept through the world, and reading the TEG report might not have been on top of many agendas.  

The process has not been smooth sailing – as one can expect when it comes to finding consensus around a definition of “environmental sustainability"
Nina Ahlstrand

The European Commission received almost 50,000 comments on the drafts published in November, and the initial timeline of finalizing the technical screening criteria by year end was understandably delayed. Hence, on 21 April, after at least two rounds of informal leaked drafts, the much awaited final versions were released. 

Technical screening criteria for the remaining four environmental objectives are still to be negotiated, where drafts are expected to be published in June 2021. In addition, the EU Taxonomy is meant to be a dynamic tool, changing over time with new activities and sectors coming in, and thresholds continuously developing, as new technologies and possibilities come into play.

Adjustments to technical screening criteria – balancing science-based ambitions with political pressure

The EU Taxonomy Climate Delegated Acts published in April include several changes to the technical screening criteria compared to the November drafts, as could be expected given the amount of feedback. Some changes have presumably been made to make the criteria more user-friendly, but some debate has also risen around adjustments being made as a result of political pressure, questioning if the EU Taxonomy is moving away from its initial science-based track.  

Some debate has also risen around adjustments being made as a result of political pressure, questioning if the EU Taxonomy is moving away from its initial science-based track
Nina Ahlstrand

Below, we highlight a few of the changes that have been made, focusing on the criteria for ensuring substantial contribution to climate change mitigation. This is not an exhaustive list, and for full details we refer to the communications from the European Commission.

Buildings: Criteria for existing buildings as well as for new construction have been changed. There has been much debate around the European Commission’s November proposal which stated that a building constructed before 2021 needed an Energy Performance Certificate of A to qualify. This marked a noteworthy change from the TEG’s proposal from March 2020, where they recommended that the 15% most energy efficient buildings in the local stock should qualify. Earlier in the process, the TEG evaluated using EPC labels as the basis for setting thresholds, but had come to the conclusion that the EPC methodologies were not harmonized across EU countries and therefore was ill-suited to be used as a common threshold. The European Commission received similar feedback, and has now added the top 15% approach as an alternative to the EPC A threshold. 

For buildings built in 2021 or later, the criterion has also been updated. The November draft presented a threshold where the primary energy demand of a building should be 20% lower than the national thresholds set for NZEB (nearly-zero energy buildings) to qualify. This threshold has now been reduced to 10%. 

The threshold for renovation of buildings remains unchanged at 30% reduction in primary energy demand. 

Shipping: The shipping sector was not part of the TEG proposals published in March 2020, but was included in the European Commission’s November 2021 draft. As for transport in general, zero direct (tailpipe) emissions is the focus point for eligibility. For several activities within transport, including shipping, a “buffer period” until 2025 has been included to allow a certain amount of direct emissions in the short term. For shipping, this means that until 2025, vessels are aligned if they derive at least 25% of their energy from zero direct emission fuels for their normal operations. This is a reduction from the previous 50% threshold included in the November drafts. After 2025, only zero direct emissions will qualify. Vessels dedicated to transporting fossil fuels are still excluded.  

Forestry: The criteria for forest management have been heavily discussed and has also undergone some various changes over the course of this process. What was initially called existing forest management in the TEG proposal from March 2020, became improved forest management in the European Commission’s November draft, and is now simply called forest management. The November draft included criteria that by many were viewed as too cumbersome, including requirements to perform climate benefit analyses as well as proving additionality of the investment. In addition, the overall purpose of the forest management activity had to be climate change mitigation. According to some, this is typically not the primary purpose, but it is the positive effect – not only including the carbon sequestration from forests, but also taking into account forest materials as a relevant substitution for other emission-intensive materials in construction. The new version relaxes some of these requirements. The overall purpose is no longer listed as climate change mitigation, and the need to show additionality has been removed. In addition, forest holdings below 25 ha no longer needs to perform a climate benefit analysis to show alignment.  

Energy: The general threshold of 100g CO2/kWh remains, and so does the criteria for some energy sources to prove they are below the thresholds, while others automatically qualify. Examples of the latter are wind and solar, while a hydropower plants still need to perform a life cycle assessment to prove alignment with the 100g threshold. Alternatively, the hydropower plant needs to have a power density above 5W/m2. This has led to criticism from the hydropower community, stating that this energy source now faces a higher administrative burden than other renewable energy sources, creating a non-level playing field. According to the IPCC, the global average for hydropower is around 24g CO2/kWh, but with large geographical variances. This can be compared to the global averages for wind and solar of around 10g and 40g respectively. Some changes to the do no significant harm criteria for hydropower have been made, and in addition a free pass for run-of-river plants without artificial reservoirs have been added.   

Bioenergy is another field that has drawn a lot of attention. The November draft had already introduced some changes compared to the previous TEG proposals, such as less details around the feedstock and more alignment with the existing Renewable Energy Directive. The activity was labelled as a transitional activity, implying that criteria would need to strengthen over time to ensure substantial contribution to climate change mitigation. In the new version, bioenergy is no longer labelled as a transitional activity, and the criteria are aligned with the Renewable Energy Directive which in general terms sees biomass as carbon neutral. The reasoning for the TEG to go beyond this directive was based on reports indicating that carbon neutrality of biomass may be a too simplistic view of its actual implications on climate change. The relaxation of the criteria comes after heavy criticism mainly from Nordic countries where forest-based biofuels are an important source of energy. Some voices are now raised saying that this is one example of where the EU Taxonomy process has become political instead of science-based. The European Commission is facing pressure on several fronts, and by meeting the requests from the Nordics, it may find the majority needed to defend its position of fossil fuels against eastern European countries otherwise threatening to block the process.  

All items related to natural gas has been taken out of the delegated acts and will instead be revisited later this year together with agriculture and nuclear
Nina Ahlstrand

This takes us straight into the heated topic of fossil fuels in general, and specifically natural gas. For many countries, natural gas is seen as an important transition fuel necessary to shift away from higher emitting alternatives. The November draft included a category for ’electricity generation from gaseous and liquid fuels’, also including fossil fuels meeting the 100g threshold. In a leaked version earlier this spring, the delegated acts also included a category for the direct replacement of power plants using solid or liquid fossil fuels with more efficient gaseous and liquid fuels. This resulted in heavy backlash. The category included in the leaked draft has now been removed, and the wording from the November draft has been changed to ‘electricity generation from renewable non-fossil gaseous and liquid fuels’. All items related to natural gas has been taken out of the delegated acts and will instead be revisited later this year together with agriculture and nuclear where discussions have also been intense. Agriculture was part of the November drafts, but has now been taken out. Nuclear was never really in, based on a recommendation from the TEG that additional research was needed. Since then, additional research has been conducted pointing in the direction that nuclear might deserve a spot in the EU Taxonomy. For further clarifications on these three topics, we still need to wait a few more months. 

A polarized debate 

Much of the media headlines the last few months have focused on criteria being very strict and industries previously considered sustainable no longer being green enough according to the EU. The aim of the Taxonomy is to provide a common definition of what economic activities can qualify as environmentally sustainable. Finding consensus around such a definition is probably impossible.  

The initial aim of the EU Taxonomy is that criteria and thresholds should always be science based, and never political. After the heavy backlash in November, the European Commission has tried to accommodate some of the feedback it has received, resulting again in criticism, this time for not staying true to the science-based approach but rather giving in to political pressure. The European Commission is facing pressure from all fronts, for example resulting in natural gas entering the EU Taxonomy and then exiting again over the course of a couple of weeks.  

Organizations such as Greenpeace have called it a greenwashed regulation, and after the delegated acts were published on 21 April, five NGOs part of the EU’s expert group suspended their roles as advisors to the European Commission as they are concerned about political interference taking the EU Taxonomy too far off its science-based track. One of them said in a statement that “The EU Taxonomy law was supposed to be the gold standard of sustainable finance. But the result has been the greenwashing of dirty cargo ships, gas buses, and logging and burning trees. Environmentalists will not come back to the process until the European Commission comes back to science.” 

Opinions are strong on both sides of the fence. To reach climate and environmental targets, a science-based approach is key. But without political support, the regulations would never leave the drawing board.  

It is however important to remember that the EU Taxonomy is not a list of which assets investors or banks should or shouldn’t finance
Nina Ahlstrand

What will the EU Taxonomy mean in practice? 

Leaving differences of opinion to the side, what is very clear is that the regulatory tsunami on sustainable finance with the EU Taxonomy in the forefront has reached our coast. The EU Taxonomy is here to stay and it will have implications.  

First of all, the implications come in the form of increased reporting requirements for investors, banks and companies. Investors will already in January 2022 be expected to report on the EU Taxonomy-alignment of their portfolios, and companies will follow shortly thereafter with information on the EU Taxonomy-alignment of their revenues and capex/opex in their annual reports for 2021. 

It is however important to remember that the EU Taxonomy is not a list of which assets investors or banks should or shouldn’t finance. It will create a common reporting standard and increasing transparency, making it easier to redirect capital in a greener direction.  

As several studies have indicated, we can expect the EU Taxonomy-aligned share of the investible universe to be very low, perhaps less than 5 percent. Reaching carbon neutrality will require investments not only in what is already EU Taxonomy-aligned today, but also investments in the transition to ensure the share of EU Taxonomy-alignment increases over time. 

It remains to be seen exactly how the EU chooses to use the EU Taxonomy in the longer perspective. It has been indicated that it could impact banks’ capital requirements as well as subsidies and support programs, but as long as the share of EU Taxonomy-alignment is very small, such incentives may also create financial market distortions which may not necessarily help the initial cause. 

What we can expect with more certainly is that the EU Taxonomy will form the basis of other standards in financial markets, such as the proposed EU Green Bond Standard. This was proposed by the TEG back in 2019 as a voluntary standard, based on current best market practice but with the addition that proceeds should be earmarked for EU Taxonomy-aligned investments. We haven’t heard much from the European Commission on this topic since the TEG proposal, but additional information is now expected to come in June 2021. One key element will be if the standard will require 100 percent of the proceeds to be EU Taxonomy-aligned or if there will be a certain threshold, to qualify for the EU Green Bond label. Either way, we will surely see a number of EU Green Bonds going forward, but we expect the current ICMA standards to dominate the market in the short term to medium term as a result of the low share of EU Taxonomy-alignment in the market. The EU Taxonomy does not replace the ESG analysis already conducted today by banks and investors, and we expect green bonds of all shades to have a value also going forward as the demand for transparency steadily increases.  

What happens next?

Sustainability is high up on the political agenda in Europe, and several deliveries are expected in the coming months. Here we highlight the themes we are keeping an extra eye on. 

From two to six environmental objectives. As mentioned above, the delegated acts published in April only cover two of the six environmental objectives. As the first two are related to climate change, sectors and activities have been included based on their current carbon footprint. For the remaining four objectives, we can expect other environmental factors besides carbon emissions to play a vital role in the selection of sectors and activities. The advisory group to the European Commission, the Platform on Sustainable Finance, is currently working on criteria drafts for these environmental objectives, which you can read more about in our previous comment from March.  We now expect focus to shift towards the sectors and activities expected to be included in the next round of drafts, and within circular economy and biodiversity/nature risk, we already see companies and advisors trying to influence the definitions and lobbying on the Brussels scene. The Platform on Sustainable Finance is expected to publish their drafts in June, followed by a one month consultation period, after which final proposals are to be sent to the European Commission in September. The plan is for these delegated acts to be finalised by year end.

Sustainability reporting requirements increases in width and depth. On April 21st, in parallel with the publication of the EU Taxonomy delegated acts, the European Commission also released the Corporate Sustainability Reporting Directive (CSRD), a legislative proposal that will revise, and replace, the the Non-Financial Reporting Directive (NFRD). The introduction of the CSRD increases the scope of companies requested to report on sustainability from around 11.000 to 49.000. The CSRD is currently on public consultation until 24 June 2021. 

‘Brown’ and ‘Social’ taxonomies are assessed, but not certain. Already early on in the process, there were discussions around not only establishing a ‘green’ EU Taxonomy, but also a ‘brown’. Whereas the green Taxonomy identifies which activities substantially contributes to the environmental objectives, a brown Taxonomy would identify those that imply significant harm. The green track was prioritised, but the Platform on Sustainable Finance is currently evaluating the possibilities of establishing a Taxonomy also for harmful activities. This would in essence establish three layers. There are diverging views across Europe on this topic. Some argue that it would make it even harder for activities that today can be considered harmful to attract the capital needed to transition, while some say that the greatest value of such a Taxonomy would be to separate harmful activities from those that are in transition but not yet reaching the thresholds for substantial contribution, based on the notion that not all activities have a place in a 2050 sustainable economy. The Platform on Sustainable Finance is expected to publish a report on their findings within ‘brown’ Taxonomy in late May or June. In parallel, another Platform subgroup is also investigating a possible Social Taxonomy, and is currently developing social objectives as well as criteria for certain activities such as social housing. It remains to be seen if this will be a separate EU Taxonomy, or if it would be merged with the environmental Taxonomy. A report on the Social EU Taxonomy is also expected in late May or early June. 

Finally, the EU’s Renewed Sustainable Finance Strategy is set to be released by the European Commission in June 2021, following a consultation last year. Building on the 2018 Sustainable Finance Strategy, this renewed strategy is expected to elaborate on usability and enforceability of the current tools and regulations developed, and attempt to ensure much-needed clarity, consistency and reduce complexity across EU legislation, regulations and standards. ESG risk in lending will be a key topic, particularly for banks. Moreover, the Renewed Strategy will address Transition Finance, to better allow all companies committed to transition to access sustainable finance. Related to this, the Renewed Strategy is expected to address new financial instruments which can better support the transition towards sustainable business models (eg. ESG-linked loans, KPI-linked loans, Impact-loans etc). In other words, much in store, and all within the overall purpose of levelling the playing field within sustainable finance. 

The April publications are an important step forward for the EU sustainability agenda. However, much work still remains on the political front, as well as for all the investors, banks and companies now embarking on the journey to implement these new regulations. The administrative burdon is noticable, but we shouldn’t forget the overall ambition – to mobilise capital towards a greener and more sustainable future.

The text is written by Nina Ahlstrand, Head of Sustainable Finance, DNB Markets, and Anne Margrethe M. Platou, Advisor Sustainability and Public Affairs, DNB.