Research highlights gaps in EU’s sustainable finance framework

New research suggests the EU’s sustainable finance framework urgently needs to expand and that, in its current form, the taxonomy will not meet the Paris Climate Agreement target of limiting global temperature rise to 1.5°C. 

The EU taxonomy is a classification system that defines criteria for economic activities to be considered environmentally sustainable, promoting investment in sustainable projects to help meet climate goals.

The report, produced by the Institute for Sustainable Futures (ISF) at the University of Technology Sydney, is highly relevant to the ongoing development of Australia’s taxonomy.

The research compares the EU taxonomy with scenarios devised using the One Earth Climate Model (OECM), a world-leading integrated energy assessment tool that was developed between 2017 and 2019 by ISF, the German Aerospace Centre and the University of Melbourne.

The OECM has been applied to all member states of the G20 and the EU27 region to develop energy scenarios and fair carbon budgets for each country, as well as detailed carbon budgets for key industries in each country.

Compared to the current EU taxonomy, these scenarios highlight several omissions that should be addressed in the EU taxonomy, and included in Australia’s version:

1. Broader industry inclusion: All industries and service sectors, including the currently absent chemical industry, must be included in the taxonomy.
2. Long-term goals: The taxonomy should establish long-term targets leading to net zero emissions, beyond the current 2025 and 2035 benchmarks.
3. Support for transition finance: The taxonomy must address the gap in ‘transition finance’ to aid the shift between technologies.

Science-aligned guidance for investment

For investors, the enhanced EU Taxonomy with OECM pathways will enable more effective investment in industries aligned with global climate goals. It would also offer insights into high-impact areas – such as the chemical sector – where their contributions can drive substantial environmental change and generate long-term economic returns.

OECM co-founder and ISF-UTS Research Director Associate Professor Dr Sven Teske says the EU taxonomy is a blueprint for the development of the Australian taxonomy. 

"We need to ensure that it takes in all industries and the transition finance period, or else we risk failing to meet the Paris Agreement targets. We want Australian investment to have the best chance of advancing a sustainable, low-carbon future.”

Dr Teske will be presenting this research at the COP29 conference in Azerbaijan on Thursday 14 November, at the Australian Pavilion.

See more information at www.uts.edu.au/oecm