The EU Taxonomy is a complex but crucial tool in the drive towards a sustainable future. Unlike other ESG reporting frameworks, it’s not a reporting standard itself but a classification system that defines which economic activities can be considered environmentally sustainable.
So, with that in mind, here’s a guide to what the EU Taxonomy means, the companies it impacts, how to navigate these reporting obligations, and how to make reporting easier with ESG software.
What is the EU Taxonomy?
The EU Taxonomy is a classification system established by the European Union to determine which economic activities contribute to environmental sustainability. It provides a common language for investors, companies, and policymakers to assess the green credentials of economic activities. The taxonomy is designed to prevent “greenwashing” by providing clear criteria for what constitutes a sustainable activity.
The six environmental objectives
The EU Taxonomy defines six environmental objectives that align with the goal of net zero by 2050:
- Climate change mitigation: reducing greenhouse gas emissions.
- Climate change adaptation: building resilience to the impacts of climate change.
- Sustainable use and protection of water and marine resources: ensuring water resources are managed sustainably.
- Transition to a circular economy: promoting resource efficiency and waste reduction.
- Pollution prevention and control: reducing pollution and its impact on human health and the environment.
- Protection and restoration of biodiversity and ecosystems: protecting and enhancing biodiversity and ecosystems.
While the EU Taxonomy is a European regulation, its implications extend beyond the EU’s borders. Many global companies, especially those with significant operations or financial dealings in the EU, are impacted.
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Who is affected by the EU Taxonomy?
- Financial institutions: banks, insurers, and asset managers must disclose how much of their portfolios align with the taxonomy.
- Non-financial companies: larger companies will need to disclose taxonomy-aligned revenues and capital expenditures.
- Investors: the taxonomy provides a tool to assess the sustainability of investments.
Why is the EU Taxonomy important for sustainability?
The EU Taxonomy plays a pivotal role in driving sustainable finance and investment. By providing a clear definition of what constitutes a sustainable economic activity, it:
- helps channel investments towards environmentally friendly projects.
- enhances transparency and comparability of sustainability information.
- contributes to the EU’s climate and environmental goals.
- reduces the risk of greenwashing.
Timelines and deadlines to take note of
The EU Taxonomy is being phased in gradually. While the core framework has been established, technical screening criteria for specific economic activities are being developed and updated regularly.
- 2020: The Taxonomy Regulation entered into force.
- 2021-2023: The European Commission adopted delegated acts specifying technical screening criteria for various economic activities.
- 2023 onwards: Ongoing development and refinement of the taxonomy, including the potential inclusion of new environmental objectives.
Additional deadlines to be aware of
- Financial institutions: Disclosure requirements related to the taxonomy have already come into effect.
- Non-financial companies: The exact timeline for disclosure requirements will depend on the size of the company and other factors.
The EU Taxonomy is a dynamic framework, and staying updated on the latest developments is crucial for businesses and investors alike.
It’s important to note that while the UK is no longer part of the EU, it is developing its own green taxonomy. However, the EU Taxonomy can still serve as a benchmark for UK companies seeking to demonstrate their sustainability credentials to international investors.
By understanding the EU Taxonomy and its implications, companies can position themselves as leaders in sustainable business practices and contribute to a more sustainable future.
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