EU Taxonomy - How well prepared is your company?

The European Parliament adopted the Taxonomy Regulation on 18th June 2020, following the Disclosure Regulation of 2019. It is a further key achievement within the EU's legitimate and administrative system related to Environmental, Social and Governance (ESG) components that impacts the resource management sector.

 

What is the EU Taxonomy?

The EU Taxonomy is an administrative classification framework that helps companies to characterize which of their financial practices are ecologically sustainable. The guidelines also place a reporting obligation on companies with more than 500 employees to reveal what share of their investments is lined up with sustainable activities. The European Commission developed an IT tool that encourages the utilization of the Taxonomy by permitting clients to effectively explore the regulation.

EU-Taxonomie-Verordnung2

What is the purpose of the EU Taxonomy?

The function of the EU Taxonomy is to assist companies, venture promoters and issuers to enhance their environmental performance by introducing performance thresholds to help distinguish which exercises are sustainable, and which are most certainly not. By setting up a list of common rules characterizing what a green investment is, the EU  ensures that investors spend their money on actual sustainable activities.

Taxonomie-Verordnung und delegierte Rechtsakte

The Taxonomy Regulation was published in the Official Journal of the European Union on 22nd June 2020 and came into force on 12th July 2020. It establishes a system for the EU Taxonomy by setting out different overarching conditions that need to be fulfilled to claim the environmental sustainability of an economic activity.

As of now, the regulation focuses primarily on environmental objectives but, driven by the recent Covid-19 pandemic, social and governance objectives will soon get incorporated as well. The Taxonomy Regulation sets up six EU environmental objectives which define green economic activities:

  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

It additionally sets out four conditions that an economic activity needs to meet to be perceived as Taxonomy-aligned:

  1. Making a substantial contribution to at least one environmental objective
  2. Doing no significant harm to any other environmental objective
  3. Complying with minimum social safeguards
  4. Complying with the technical screening criteria 

Who is affected by the EU Taxonomy?

The EU Taxonomy points out three groups of primary Taxonomy users:

  1. Financial market members, advertising financial services and products within the EU, including occupational pension providers.
  2. Large organizations who are required to give a non-financial statement, as indicated by the Non-Financial Reporting Directive.
  3. The EU and the Member States, when setting up public measures, guidelines, or labels for green financial products or bonds. 

Conclusion

     
  Despite the EU Taxonomy’s environmental focus, it too incorporates fundamental social and governance criteria that are reasonably simple to comply with. It is important to focus on social and governance criteria too since most sustainable funds consider all components of ESG. The EU Taxonomy brings greater transparency and uniformity which might eliminate any doubts investors may have about greenwashing and builds greater confidence in the sustainability of their investments. From 2021, companies need to outline their Taxonomy-aligned economic activities in their non-financial statement.  
     

 

Together with EurA

EurA can help you to turn the EU Taxonomy into an opportunity for your business by enlightening the ways to adapt the operations in such a way that they fulfill EU environmental objectives. This also improves your ability to attract investors. Start screening your business now to remain competitive. For more information and support, feel free to drop us an email.

 

Author: Shashank Goyal

Dr. Denise Ott

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Dr. Denise Ott

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