In Brief:
The EU Commission introduced the Action Plan on Sustainable Finance in 2018 to guide investments towards sustainable projects and fulfill climate and energy targets.
The EU Taxonomy Regulation was implemented as part of the Action Plan to establish a universal terminology and classification system for sustainable economic activities.
The Taxonomy Regulation defines six environmental objectives, including climate change mitigation, circular economy transition, and biodiversity protection.
The Taxonomy Regulation imposes reporting obligations on certain entities, amending the Non-Financial Reporting Directive and the Sustainable Finance Disclosure Regulation.
In March 2018, the EU Commission introduced the “Action Plan on Sustainable Finance” with the objective of guiding investments towards sustainable projects and endeavors. One of its main purposes The goal is to reach a climate-neutral economy in the EU by 2050, with a reduction of 55% already implemented in 2030.was to fulfill the goals outlined in the European Green Deal. The initial key step of this plan involved establishing a universal terminology and precise definition for activities that can be deemed “sustainable” in the economic realm. In pursuit of this objective, the EU Commission implemented a classification system known as the “Taxonomy Regulation” or “EU Taxonomy.” This system provides a comprehensive list of economically sustainable activities that align with the six environmental objectives specified by the Commission: climate change mitigation, climate change adaptation, preservation and responsible use of water and marine resources, transition to a circular economy, prevention and control of pollution, and protection and restoration of biodiversity.
Simplifying the EU Taxonomy
With its extensive document spanning hundreds of pages, the EU Taxonomy Regulation might appear intimidating at first glance. However, understanding its core concepts is essential. At its core, the Taxonomy serves as a classification system for economic activities, defining which activities are considered environmentally sustainable. It addresses the issue of greenwashing by enabling market participants to confidently identify and invest in sustainable assets. Additionally, the regulation introduces new disclosure obligations related to the Taxonomy for companies and financial market participants. Central to the Taxonomy Regulation is the definition of a sustainable economic activity. To qualify as sustainable, an activity must meet two criteria: contribute to at least one of the six environmental objectives outlined in the Taxonomy and avoid significant harm to any other objectives, while respecting human rights and labor standards.
Taxonomy Reporting Requirements
While primarily serving as a classification tool, the Taxonomy Regulation imposes reporting obligations on certain entities. It amends the disclosure requirements in the EU’s Non-Financial Reporting Directive (NFRD) and the Sustainable Finance Disclosure Regulation (SFDR).
Under the NFRD, non-financial undertakings must disclose the proportion of turnover derived from Taxonomy activities, as well as the proportion of their capital and operating expenditure associated with these activities (Article 8 disclosure). The proposed Corporate Sustainability Reporting Directive (CSRD) will expand this requirement to a broader list of entities.
The SFDR requires entities falling under its scope to disclose information on the alignment of their products with the Taxonomy. This includes products with sustainable investment objectives (Article 9 SFDR) and those with environmental or social characteristics (Article 8 SFDR). Entities that do not consider the EU criteria for environmentally sustainable activities must make a statement to that effect (Article 7 SFDR).
Strategic Preparation for a Greener Future
The EU Taxonomy Regulation is a vital tool in driving the transition to a sustainable economy and achieving climate neutrality. By providing clarity on sustainable economic activities, it helps combat greenwashing and encourages investments in environmentally friendly assets. As the Taxonomy evolves and becomes integrated into various policy measures, its impact on financial markets and corporate practices will likely expand. Staying informed about the Taxonomy and its reporting requirements will be crucial for businesses and investors seeking to align with sustainable objectives and contribute to a low-carbon future.
As companies prepare to meet the EU Taxonomy requirements, they can benefit from early preparation, including eligibility assessments, alignment analyses, and designing data collection processes. By embracing these measures, companies can position themselves as drivers of sustainable change and contribute substantially to the EU’s environmental objectives.
