The EU Taxonomy, a central framework for sustainable finance, is under scrutiny as stakeholders push for major reforms to address its complexities. A recent report by the EU Platform for Sustainable Finance outlines significant challenges faced by companies in adhering to the Taxonomy, particularly around the ease of reporting and data quality.
Launched as a standard to guide environmentally sustainable investments, the EU Taxonomy was initially hailed as a gold standard. However, two years after its implementation, many businesses have found it cumbersome to comply with the framework’s detailed requirements.
The EU Platform’s usability review highlights several obstacles, notably the challenges of applying the “Do No Significant Harm” (DNSH) principle, which requires companies to demonstrate that their activities do not harm other environmental objectives. The principle’s complexity has been flagged as a major hurdle, particularly in retrospectively verifying compliance. Moreover, only 3% of the criteria are quantitative, further complicating the consistency of data collection.
For financial institutions, the Green Asset Ratio (GAR) and Green Investment Ratio (GIR) metrics, designed to measure the sustainability of investment portfolios, have proven difficult to apply in practice. The report notes that these key performance indicators (KPIs) are not functioning as originally intended, with inconsistencies in reporting creating confusion.
The Platform’s findings lead to five key recommendations aimed at simplifying the Taxonomy’s implementation. The first is to refine the DNSH assessment, tailoring it to different industries and geographical contexts. This change would streamline compliance processes for both financial and non-financial entities.
A second recommendation calls for introducing a materiality principle to reduce excessive reporting requirements, especially for non-financial firms. Additionally, allowing financial institutions to use estimates and proxies when calculating the GAR and GIR would reduce the administrative burden while maintaining the framework’s integrity.
The report also suggests developing simpler, voluntary reporting options for small and medium-sized enterprises (SMEs), addressing their concerns over the disproportionate impact of sustainability reporting.
The Platform’s proposed reforms aim to reduce complexity without compromising the Taxonomy’s goal of steering investment towards sustainable and climate-resilient projects. As part of these changes, the group advocates for clear guidelines on the use of estimates and a simplified approach for retail assessments.
The European Commission now faces the critical task of deciding whether to adopt these recommendations. With the financial sector increasingly reliant on clear and comparable data to meet sustainability goals, the stakes are high. President Ursula von der Leyen’s announcement in November 2024 of plans to streamline EU sustainability reporting into a single regulation signals an intent to address these issues.
While the Taxonomy has garnered support for its role in advancing Europe’s green transition, its effectiveness hinges on how well it can balance regulatory rigor with practical usability. If the Commission moves forward with these proposed changes, the EU Taxonomy could strengthen its position as the global benchmark for sustainable finance. However, failing to act risks undermining confidence in a system designed to drive Europe’s green economy.
As Linda Zeilina-Cross, CEO of the International Sustainable Finance Centre, notes, “The Taxonomy is working on the ground, despite the need for simplification and adjustments based on the learnings from its implementation.”
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