Navigating the EU Taxonomy: A Practical Overview for Companies
Everybody talks about it - but what exactly is it?
The EU Taxonomy is a classification system established by the European Union to define what constitutes an environmentally sustainable economic activity.
It's a critical piece of regulation, setting the bar for sustainability and guiding investments towards greener practices. This system is essential for Europe's green transition, ensuring that businesses, investors, and projects align with the EU's ambitious climate and environmental objectives. Let's dive in and explore how companies can navigate this regulation.
The Core Elements of the EU Taxonomy
Unmasking Sustainable Investments: The Taxonomy is like your sustainability detective kit, helping you identify eco-friendly investments. It's the tool that businesses use to ensure their activities meet Europe's green standards (Hoepner & Schneider, 2022).
Busting Greenwashing: Armed with the Taxonomy, companies can combat the greenwashing threat. It provides the rules for transparent sustainability disclosures, ensuring that environmental claims are genuine and verifiable. (Pacces, 2021)
Redefining Building Standards: The Taxonomy introduces a new set of building blocks in the real estate and construction sector, with enhanced standards for sustainability and ESG integration (Norang et al., 2023)
The Balancing Act of Technical Thresholds: It's like walking a tightrope between low and high emissions. The Taxonomy sets performance thresholds, challenging companies to maintain a delicate balance in their environmental impact, especially in sectors not covered by the regulation (Schuetze & Stede, 2020)
The Six Categories of Sustainable Activity
The Taxonomy categorises sustainable activities into six key areas:
Climate Change Mitigation: Strategies and technologies reducing factors that lead to climate change, e.g. greenhouse gases.
Climate Change Adaptation: Measures to adjust to current and future climate impacts.
Sustainable Water Use: Efficient and responsible management of water resources.
Circular Economy: Promoting reuse, recycling, and reducing waste, and the general goal of closed loops for all resources.
Pollution Control: Efforts to reduce pollution and improve air, water, and soil quality.
Biodiversity Protection: Preserving and restoring natural ecosystems and species.
Within these six categories, organisations have to meet the following four overarching conditions to qualify as environmentally sustainable:
Making a substantial contribution to at least one environmental objective;
Doing no significant harm to any of the other five environmental objectives;
Complying with minimum safeguards
Complying with the technical screening criteria set out in the Taxonomy delegated acts. (European Union, 2023)
These categories span various sectors, including renewable energy, energy efficiency, and carbon management, potentially including natural gas and nuclear energy. They emphasise innovation, improved production processes, and overall environmental performance (Lucarelli et al., 2020)
For whom is it important?
Large companies, particularly those publicly listed or with significant public interest, must comply with the EU Taxonomy by 2022. This obligation also includes financial market participants like investment and pension funds.
The essential task is incorporating the Taxonomy's sustainability criteria into their operations and investment strategies. Specifically, they need to report how their activities align with the six defined environmental Categories of the Taxonomy. (Dobránszky-Bartus et al., 2020)
As you can see, the EU Taxonomy isn't just another regulation; it's a pivotal tool in Europe's green transformation. By understanding and embracing its key aspects and categories, companies don't just comply with regulations—they become active participants in the journey towards a more sustainable and environmentally conscious Europe.
Sources:
Dobránszky-Bartus, K., & Krenchel, J. (2020). The EU sustainable finance taxonomy regulation. Economy & finance. https://doi.org/10.33908/ef.2020.4.2 (accessed on 13.11.23)
European Union (2023). EU taxonomy for sustainable activities, https://ec.europa.eu/sustainable-finance-taxonomy/ (accessed on 13.11.23)
Hoepner, Andreas G. F. and Schneider, Fabiola (2022). EU Green Taxonomy Data – A First Vendor Survey. The Economists’ Voice, http://dx.doi.org/10.2139/ssrn.4233963 (accessed on 13.11.23)
Lucarelli, C., Mazzoli, C., Rancan, M., & Severini, S. (2020). Classification of Sustainable Activities: EU Taxonomy and Scientific Literature. Sustainability, 12(16), 6460. https://doi.org/10.3390/su12166460 (accessed on 13.11.23)
Norang, H., Støre-Valen, M., Kvale, N. and Temeljotov-Salaj, A. (2023). "Norwegian stakeholder's attitudes towards EU taxonomy", Facilities, Vol. 41 No. 5/6, pp. 407-433. https://doi.org/10.1108/F-03-2022-0051 (accessed on 13.11.23)
Pacces, A. M. (2021). Will the EU Taxonomy Regulation Foster Sustainable Corporate Governance? Sustainability, 13(21), 12316. https://doi.org/10.3390/su132112316 (accessed on 13.11.23)
Schuetze, Franziska and Stede, Jan, EU Sustainable Finance Taxonomy – What Is Its Role on the Road towards Climate Neutrality? (December 2020). DIW Berlin Discussion Paper No. 1923, https://ssrn.com/abstract=3749900 (accessed on 13.11.23)