Do you know what EU Taxonomy is?

The COVID-19 pandemic has reinforced the need to redirect money toward sustainable projects in order to make the world’s economies, businesses, and societies more resilient against climate shocks. In a bid to help establish a clear definition of what is ‘sustainable’, the EU recently adopted an action plan on financing sustainable growth, more widely known as an “EU taxonomy”.

What is EU Taxonomy?

Set into force from 12th July 2020, the EU Taxonomy is an EU Regulation (2020/852) aiming to establish a common system for the classification of environmentally sustainable economic activities. Forming an integral part of the European Green Deal, as well as of the EU Action Plan on Sustainable Finance, the EU Taxonomy is a plan aiming to scale up sustainable investment by guiding private investment to activities that are needed to achieve climate neutrality, in order to help the EU meet the EU’s climate and energy targets for 2030.

 

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What is the European Green Deal?

Aiming to transform the EU economy into a sustainable future, the European Green Deal of 2019 is an integral part of the European Commission’s strategy to implement the United Nation’s 2030 Agenda and the Sustainable Development Goals. The European Green Deal was among the first groundbreaking announcements by the then-newly elected EU Commission President, Ursula von der Leyen. Her 24-page agenda for Europe, under the name ‘European Green Deal’, shared targets for a more environmentally oriented Europe, with six key areas of focus:

• A climate-neutral EU by 2050;
• An improved ETS;
• A carbon border tax;
• A move away from unanimous decision-making on climate and energy;
• 2030 emission reduction targets of at least 50% and moving ‘towards’ 55%.

In a bid to mainstream sustainability in all EU policies, the Green Deal strategy has focused, among others, on strengthening the foundations for sustainable investment. This is what made the European Parliament and Council to adopt the taxonomy for classifying environmentally sustainable activities in July 2020. Under the Deal, sustainability has to be further embedded into the corporate governance framework, as many companies still focus too much on short-term financial performance compared to their long-term development and sustainability aspects.

At the same time, companies and financial institutions need to increase their disclosure on climate and environmental data, so that investors are fully informed about the sustainability of their investments. Amid these needs, a growing interest has been emphasized on ESG (Environmental, Social and Governance) reporting, helping companies’ social and environmental efforts to be quantifiable, thus more easily measured, for investors to evaluate a company and determine if this is worth investing in.

What does “environmentally sustainable” mean?

Under the EU Taxonomy Regulation, economic activity is categorized as “environmentally sustainable” when:

• it contributes significantly to the achievement of one or more of the 6 aforementioned environmental objectives;
• it does not do significant harm to other environmental objectives;
• it is exercised in accordance with the minimum safeguards (e.g., OECD guidelines, UN Guiding Principles, principles, and rights from fundamental conventions identified in the International Labor Organization’s declaration); and
• it complies with technical screening criteria, which the climate delegated act sets out in relation to climate change mitigation and climate change adaption.

Taxonomy Regulation and delegated acts

Under the Taxonomy Regulation, the Commission had to come up with the actual list of environmentally sustainable activities by defining technical screening criteria for each environmental objective through delegated acts. Effective from January 2022, the first delegated act was on sustainable activities for climate change adaptation and mitigation objectives. The Act contained technical criteria for the first two EU Taxonomy objectives, i.e., climate change mitigation and climate change adaptation.

In February 2022, the European Commission launched a Taxonomy Complementary Climate Delegated Act on climate change mitigation and adaptation covering certain gas and nuclear activities. The complementary act introduced additional economic activities from the energy sector into the EU Taxonomy, as well as specific disclosure requirements for businesses related to their activities in the gas and nuclear energy sectors. The technical criteria for the remaining objectives are expected within 2022.

 

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