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.

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.

What is the purpose of the EU Taxonomy?

To achieve the EU's climate targets, it is essential to expand and promote sustainable investments. However, this first requires the definition of sustainable investments. Such a classification system, based on technical evaluation criteria, was created with the EU Taxonomy. It can be used to determine the degree of environmental sustainability of an investment. It thus provides orientation and sets incentives for sustainable investments - for companies, project promoters, investors and many more.

Taxonomy Regulation and Delegated Acts

The Taxonomy Regulation was published in the Official Journal of the European Union on 22^nd June 2020 and came into force on 12^th July 2020. The Taxonomy defines overarching conditions that an economic activity must meet to be classified as environmentally sustainable.

As of now, the regulation focuses primarily on environmental objectives but driven by the Covid-19 pandemic, social and governance objectives are to be incorporated soon. 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 

Note: The technical screening criteria are specified in the corresponding delegated acts. Carbon footprint analyses or life cycle assessments (LCA) may support the fulfillment of the criteria and may even be required. 

Who is affected by the EU Taxonomy?

The EU Taxonomy points out three primary target groups:

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. 

In addition, with immediate effect, companies that are already subject to reporting requirements within the meaning of the NFRD (Non-Financial Reporting Directive) or CSR-RUG (Richtlinieumsetzungsgesetz) are also obliged to report on the taxonomy. 

Where can one find guidance on the Taxonomy Regulation?

The European Commission has developed an Excel Tool that facilitates the introduction to the taxonomy and shows an allocation of various economic activities to activities defined as sustainable in the regulation.

The contents of this tool have also been transferred into a web-based application, the EU Taxonomy Compass. The search function of the Compass enables a quick and uncomplicated assignment of activities to the taxonomy.

Conclusion

Together with EurA

At EurA we help you to turn the EU Taxonomy into a competitive advantage for your business. We show you how to adapt your business to meet the EU’s environmental objectives. This will also improve your ability to attract investors. Start screening your business now and identify the share of your taxonomy-aligned business activities and investments . For more information and support, feel free to use the contact form below.

You can find out more about our sustainability consulting here.

Author: Shashank Goyal