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The EU Taxonomy. Transitioning our way out of the climate crisis

27 August 2020

By Nina Lagron, CFA, Head of Large Cap Equities, La Française AM.

The EU taxonomy is a tool to help investors understand whether an economic activity is environmentally sustainable, and to navigate the transition to a low-carbon economy. Setting a common language between investors, issuers, project promoters and policy makers, it helps investors assess whether investments are meeting robust environmental standards and are consistent with high-level policy commitments such as the Paris Agreement on Climate Change.

In December 2019, the European Commission presented the European Green Deal, an overarching framework and program of actions to transform the European economy. A key component of the Green Deal is the proposed ‘Climate Law’ embedding a legal commitment for the EU to achieve climate neutrality by 2050. The EU put a more ambitious strategy on adaptation to climate change on the table, building from the 2013 strategy and the adaptation current key targets are at least 40% cut in greenhouse gas emissions (from 1990 levels), at least 32% share for renewable energy and at least 32.5% improvement in energy efficiency – but more ambitious targets are currently being considered.

Other core components of the Green Deal are strategies and actions on supplying clean, affordable and secure energy, biodiversity, zero pollution, a circular economy and sustainable food production. These overarching objectives are addressed through financial and real-economy policy, across the public and private sectors.

The adoption of the Taxonomy Regulation in June 2020 marks the final step of the legislative process for creating the world’s first green classification of sustainable economic activities.

By re-orienting private sector investments to green technologies and businesses, this piece of legislation will serve as guidance for the EU to reach climate neutrality by 2050.

It transforms the European Green Deal into an actionable roadmap for investors to be in line with the COP 21 targets and therefore it aims to decarbonize high emitting sectors and grow low carbon sectors.

The EU taxonomy is one of the most significant developments in sustainable finance and will have wide ranging implications for investors and corporates in the EU and worldwide.

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