EU Taxonomy

The EU Taxonomy has emerged as a vital framework in the realm of sustainable finance and environmental accountability. With a focus on driving investments towards environmentally sustainable activities, the EU Taxonomy has implications for companies, investors, and the financial industry as a whole. 

Why was EU Taxonomy put into place?

To fulfill the ambitious climate and energy targets set by the EU for 2030 and to align with the principles of the European Green Deal, a strategic shift towards funding sustainable initiatives is imperative. A crucial step in this journey involves channeling investments that promote environmental responsibility. However, to effectively navigate this transition, it is essential to establish a shared understanding and precise criteria for what qualifies as ‘sustainable’. Recognizing this necessity, the action plan on financing sustainable growth advocated for the establishment of a unified framework termed the “EU taxonomy”. By adopting a standardized approach, the EU aims to harmonize efforts, facilitate informed decision-making, and accelerate progress towards a greener and more resilient future. 

What is EU Taxonomy?

The EU Taxonomy is a common classification system for sustainable economic activities. It sets out criteria for determining which activities contribute to six environmental objectives (see below). The taxonomy framework covers a wide range of sectors, such as energy, agriculture, manufacturing, and more.  

All relevant companies are required to reveal how they integrate sustainability according to the taxonomy regulation. This involves disclosing EU taxonomy-aligned turnover, capital expenditure, and operating expenses. These disclosures should be included in non-financial reports, likely within the annual report or a dedicated sustainability report like the CSRD.
 

Environmental Objectives:

At the heart of the EU Taxonomy are six pivotal environmental objectives that collectively address the most pressing challenges humanity faces in terms of environmental degradation: 

• Climate Change Mitigation: Activities that contribute to reducing greenhouse gas emissions, such as renewable energy generation, energy-efficient technologies, and sustainable transportation, fall under this category. 
• Climate Change Adaptation: This objective encompasses activities that enhance society’s resilience to the impacts of climate change, including flood protection infrastructure, drought-resistant agriculture, and resilient urban planning. 
• Sustainable Use and Protection of Water and Marine Resources: Economic activities that promote the responsible management of water resources, prevention of water pollution, and conservation of marine ecosystems are covered here. 
• Transition to a Circular Economy: Activities related to recycling, reusing, and minimizing waste, as well as the design and production of products with extended lifecycles, fall within this objective, promoting a more sustainable consumption and production cycle. 

• Pollution Prevention and Control: This objective emphasizes activities that aim to prevent, reduce, and eliminate pollution, encompassing sectors such as clean technologies, waste management, and sustainable agriculture practices. 
• Protection and Restoration of Biodiversity and Ecosystems: Activities that contribute to conserving and restoring ecosystems, protecting biodiversity, and ensuring sustainable land use are included in this objective. 

The Taxonomy Regulation establishes four key requirements for an economic activity to be deemed environmentally sustainable: 

1. Significantly contributing to at least one environmental goal 

1. Avoiding negative impact on the other five environmental goals 

1. Adhering to basic safeguards 

1. Meeting the specified technical screening criteria detailed in the Taxonomy delegated acts 

Which companies must comply with EU Taxonomy? 

EU taxonomy applies to large companies subject to the CSRD (NFRD), financial market participants (even those outside the EU) offering financial products in the EU, and the EU along with its member states when establishing green financial product standards. These entities are obligated to disclose how their investments align with the taxonomy’s criteria, facilitating transparency in sustainable finance practices. 

EU Taxonomy Status and Timeline: 

The EU Taxonomy was officially adopted in June 2020. It entered into force progressively, with its most impactful provisions taking effect from January 1, 2022. This marked the beginning of the disclosure requirements for larger companies and financial market participants. By January 1, 2023, additional disclosure obligations came into play. Over the coming years, more sectors and activities will be included, with the aim of making the EU Taxonomy an all-encompassing standard. 

How to Prepare for EU Taxonomy: 

1. Understanding the Criteria: Companies and financial market participants must familiarize themselves with the detailed technical screening criteria outlined in the taxonomy. This involves comprehending the metrics and thresholds set for each environmental objective. 

1. Assessment and Reporting: Businesses need to assess their activities and investments against the taxonomy’s criteria. This process involves evaluating the degree to which their operations contribute to the specified environmental objectives. Clear and accurate reporting is essential to demonstrate alignment. 

1. Engagement with Advisors: Collaborating with sustainability experts, consultants, and legal advisors can help ensure compliance and facilitate the integration of sustainability considerations into business strategies. 

1. Investment Decisions: Financial market participants must integrate the taxonomy’s criteria into their investment decisions, ensuring that the investments they offer or manage are in line with it. 

Conclusion 

The EU Taxonomy stands as a landmark effort by the European Union to foster sustainable finance and promote environmentally responsible practices across industries. By providing a standardized framework for categorizing environmentally sustainable activities, the EU Taxonomy empowers investors and stakeholders to channel resources towards activities that contribute to a greener future. As its implementation continues to unfold, companies and financial market participants must remain vigilant in adapting their practices to align with it. Through collective efforts, the EU Taxonomy has the potential to drive lasting positive change and contribute to the global sustainability agenda.