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While the EU taxonomy framework establishes various incentive mechanisms to help reorient finance towards sustainable economic activities, there is a question as to how effective it is in relation to reorienting finance towards activities with positive biodiversity impacts (e.g. conservation and restoration) and activities that reduce pressure on ecosystems.

This paper reviews how the taxonomy in its current state is critically limited as a tool to support these nature-positive activities. Although the market of nature-focused funds has been growing for the past years, our review of empirical data shows that nature focused funds do not currently report against or use the taxonomy as the supportive structure it was meant to be, and this may be because of regulatory inconsistencies which mean that biodiversity is currently only weakly integrated into the taxonomy framework.

Despite the original ambition of the Taxonomy Regulation to cover five macro sectors of economic activities that can qualify as substantially contributing to the biodiversity environmental objective, the Environmental Delegated Regulation falls far short of this ambition. In this context, we renew calls to expand the current sector coverage in the Environmental Delegated Regulation for the biodiversity environmental objective to cover the critical sectors of agriculture, fisheries and forestry. Not only are these the sectors that require the most funding to achieve biodiversity objectives, but these are also the sectors that receive the most attention from investors and are identified as the sectors where nature-based projects have the greatest potential.

Additionally, the paper summarises how nature-based solutions provide practical ecosystem-service based solutions to societal and economic problems and therefore may offer greater opportunities for monetisation compared to traditional conservation and restoration projects. This in turn means that they can help address the problem that conservation and restoration projects hold little attractiveness for private investors and increase investment towards nature-positive activities. However, nature-based solutions are not currently integrated into the taxonomy framework in a manner which supports the biodiversity environmental objective. Developing a comprehensive classification of nature-based solutions in relevant sectors within the taxonomy framework could further enhance the ability of the taxonomy to increase investment in nature-positive activities.

Ultimately, the conclusion of this paper is similar to the previous paper in this series (How to reveal nature-negative investments and support their reduction?) – further development of the regulatory framework is required so that it effectively contributes to the policy objective of reorienting finance towards nature-positive activities (as part of sustainable economic activities generally). At the moment the taxonomy framework has significant gaps in relation to the biodiversity environmental objective – and as the very foundation of the EU sustainable finance framework, it is critical that the taxonomy framework evolves to effectively support the reallocation of finance towards nature-positive activities.

The paper intervenes in the context of the Commission’s ambition to reduce the burden associated with reporting requirements by 25% and various announcements in relation to proposed omnibus legislation to simplify the Taxonomy Regulation, CSRD and Corporate Sustainability Due Diligence Directive. Although enhancing the taxonomy to foster a more comprehensive approach to the biodiversity environmental objective need not be contradictory to reducing the reporting burden, it is difficult to reconcile this political direction of travel with the conclusion of the paper that further development of the Taxonomy Regulation is necessary to achieve the policy objective of helping to reorient finance towards biodiversity protection and restoration.