By Paolo Masoni, Ecoinnovazione srl. Member of the EU Technical Expert Group on Sustainable Finance.

Last March, the Final report of the Technical Expert Group on Sustainable Finance (the “Taxonomy”) was published, and this “Deep Dive” piece provides an overview of what it is, why is a life cycle approach important for it, and what could be the role for the Life Cycle community in its full implementation. The Sustainable Taxonomy is a classification system at European Union level to establish clarity on which economic activities qualify as ‘green’ or ‘sustainable’. It shows the environmental performance and minimum social standards that are necessary for economic activities to reach Europe’s climate and environmental goals. It has been developed by the EU Technical Expert Group on Sustainable Finance, established to advise the European Commission on implementation of the Action Plan on Financing Sustainable Growth (see picture).

The Taxonomy, in line with the proposed Taxonomy Regulation, considers an economic activity to be sustainable if it substantially contributes to at least one of the 6 environmental objectives, without significantly harming the other 5 objectives, and it is carried out in compliance with minimum social safeguards. The 6 environmental objectives are (the current version of the Taxonomy is limited to the activities providing a substantial contribution to climate objectives, 1 and 2):

  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.

In developing technical thresholds and criteria, the TEG has put a great emphasis on life-cycle considerations in order to avoid errors such as considering sustainable any economic activity that may have negative effects during its upstream or downstream stages.

The Taxonomy is a tool for the financial sector; in this sense, the TEG faced the problem to find the right compromise between the scientific robustness of methods and metrics and their applicability in the specific financial context. Moreover, robust life cycle data and benchmarks are not available for most of the economic activities, making difficult the definition of thresholds based on them. For these reasons, the life cycle considerations have been pragmatically implemented. Whenever available knowledge and data made it possible, climate mitigation thresholds have been based on a full life cycle carbon footprint, such as for the electricity production, where the TEG has defined an ambitious threshold of 100 gCO2eq/kWh. In other cases, the thresholds have been defined considering only the life cycle phases contributing the most to environmental impacts (mostly the use phase). For example, this was done in the transport and building sectors, leaving to following Taxonomy updates the consideration of GHG emissions in less contributing life cycle stages. In any case, criteria for “do not significant harm” to the other environmental objectives (mostly based on compliance with present European legislation) always encompass the whole life cycle.

The Taxonomy will be expanded to include adequate consideration of the other four objectives (c-f in 2021), requiring developments both on data and on methodology, and the Life Cycle community has an important role to play in this development. As mentioned above, the availability of robust life cycle data and benchmarks for many technologies and products are essential. Furthermore, quantification of impacts will also come to the fore in the near future; i.e. in addition to answering “is activity A providing a substantial contribution to environmental objective x?” as done in the current Taxonomy, we will need to address “what are the environmental effects caused by a specific investment choice?”. Answering this second type of question in a comparable way will require a harmonized consequential LCA methodology broadened to consider, besides market mechanisms, also normative, social, policy background and constraints.