Under construction: The chemical aspects of the Taxonomy Regulation – so far
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Under construction: The chemical aspects of the Taxonomy Regulation – so far

After many heated debates on what constitutes sustainable business, the final pieces of the giant EU Taxonomy Regulation puzzle are now being developed and put into place. But what is the Taxonomy? How does it work? And how on Earth is it connected to hazardous chemicals?

A transition to a sustainable economic model that respects the limits and livelihoods of our planet needs finances. So how do we make sure that the “dough” ends up in the right “oven” and not the one that is eventually going to burn the entire house down, so to speak? That question is at the very core of the EU’s Sustainable Finance Program, which aims to channel public and private money into sustainable businesses.

The Taxonomy, a part of the Sustainable Finance Program, categorises which economic activities can be labeled as truly sustainable, according to six environmental criteria:

  1. Climate change mitigation
  2. Climate change adaptation
  3. The sustainable use and protection of water and marine resources
  4. The transition to a circular economy
  5. Pollution prevention and control
  6. The protection and restoration of biodiversity and ecosystems

 

No more greenwashing of financial products

Starting this year, it will be mandatory for companies, banks and investors based in Europe, or operating a European legal entity with more than 500 employees, to report on the first two criteria: the ones concerning climate. The remaining four criteria are going to be published over the coming months, and by January 2023, it will be mandatory to report on all six.

The reports will be made public, putting an end to the opportunity of easily – and incorrectly – declaring an investment as “green”.

Since banks and investors will also have to report on the Taxonomy, they are going to want to know exactly how sustainable their clients and company investments actually are.

“If the demand for sustainable investments continues to increase, truly sustainable companies will attract more investments and loans”

If the demand for sustainable investments continues to increase, truly sustainable companies will attract more investments and loans. Public spenditure will also be linked to the Taxonomy criteria, meaning that public officials and politicians will have to double-check before wiring that transfer: Is this supplier truly sustainable?

 

Where do hazardous chemicals come into the picture?

So, the Taxonomy regulation covers six environmental criteria: Climate mitigation and adaptation, water, pollution, biodiversity and circular economy. In the past, a business activity was deemed sustainable if it contributed to at least one of these areas. The difference now, introduced by the Taxonomy and its Do No Significant Harm (DNSH) principle, is that the contribution is not allowed to hamper any of the other environmental criteria.

“Sure, the light bulb saved energy, but it also contained the very toxic heavy metal mercury”

A glowing (pun intended) example of a product fulfilling one environmental criterium while hampering another is the energy-saving light bulb.

Sure, the light bulb saved energy, but it also contained the very toxic heavy metal mercury, adding to the pollution when the bulb eventually went out and was discarded.

Since chemicals are the building blocks of materials and products that end up in nature – while they are being produced and used, but perhaps especially at their end-of-life – they play an important role in all Taxonomy criteria.

Chemical production requires a lot of energy, water, fossil (plastics and similar) or biobased feedstock. The industrial processes and the actual chemical products may pollute water, soil and air. If you add intrinsically hazardous ingredients into the mix as well, it gets very difficult to achieve circular economy, with clean cycles where the material can be used over and over again.

 

Which chemicals are covered by the Taxonomy?

In the first part of the Taxonomy climate goals – climate change mitigation and climate change adaptation – a DNSH criteria was set for pollution prevention. For most of the economic activities concerning manufacturing and construction, it is not allowed to produce, sell or use hazardous substances that are:

  • Categorised as Persistent Organic Pollutants according to the POP regulation,
  • Restricted according to EU’s chemicals regulation REACH,
  • Identified Substances of Very High Concern (SVHCs) included in the Candidate List,
  • Categorised in the EU’s electronic directive RoHs,
  • Mercury and ozone depleting substances, or
  • Chemicals that meet the SVHC criteria

The last bullet item covers substances that have been deemed unsustainable according to the Taxonomy’s DNSH criteria – a highly encouraging move that goes beyond current regulation.

This means that substances with intrinsically hazardous properties are included in the Taxonomy, even if the processes to identify and regulate them haven’t started yet.

The hazards are known; it’s just the slow, cumbersome, costly, and – sometimes – political processes of banning the substances that haven’t come into play. So, it is only fair to exclude them from sustainable investment. A good tool to identify SVHCs is the SIN List.

“Substances with intrinsically hazardous properties are included in the Taxonomy, even if the processes to identify and regulate them haven’t started yet”

The second part of the Taxonomy, naming the sustainable economic activities for the remaining four environmental topics, will be finalized this year. The DNSH criteria on pollution will be relevant for most of them as well. Economic activities like substitution of hazardous chemicals and circular use of plastics will also be added, which we will report on in detail later on.

 

A European piece of legislation with global impact

Even though the Taxonomy is an EU legislation, it is a finance regulation, requesting reports from European companies, banks and investors, regardless of where their facilities and products are located – whether it’s a factory plant in Japan, a loan to a company in India, or an investment fund in Brazil. Hence, the Taxonomy will have global repercussions. Since it is still “under construction”, it’s difficult to predict the impact.

“Are these steps too small or too ambitious?”

Will it direct green funds into the right activities and turn this supertanker of an economic model towards sustainability? Are these steps too small or too ambitious?

The Taxonomy is not perfect, and it is highly technical. Nevertheless, it is a start and a move in the right direction.

Besides the technical process, there is also a political one. The EU Commission has stirred up controversy by adding nuclear and natural gas to the first climate part of the Taxonomy. However, these additions are not yet set in stone. The European Parliament and the European Council still have the power to object, and make sure that the Taxonomy fulfills its intended purpose: To stop greenwashing and inspire adherence to the Green Deal.