The EU Taxonomy: A Quick Guide for Your Business
Sustainability has been high up on the European Commission's political agenda since the Paris Agreement. A change in the financial system plays an important role here, as plans are to direct funds specifically towards sustainable investments. To provide a common framework for sustainable investments, the European Commission has drawn up an EU action plan, the so-called EU Taxonomy, which was made official in June 2020, thereby starting a new era of sustainable financial regulations.
But what is the EU Taxonomy actually, and are you affected by it? The regulation can be overwhelming so we have summarised the most important points your business needs to know.
What is the EU Taxonomy?
The EU Taxonomy is a common classification system, providing a list of “green” and “sustainable” economic activities, and is a key element of the EU Action Plan for Sustainable Finance. It can be used as a tool to decide which economic activities can be declared sustainable and which conditions must be met for this to be the case. This is also an attempt to address greenwashing and protect investors from it. Yet, the EU Taxonomy is not a mandatory list of activities that investors need to invest in, but it will hopefully shift investments in a greener direction and lead to a transition towards sustainability in the future.
This framework will help to substantially contribute to reach the objectives of the European Green Deal, and to meet the EU’s climate targets set for 2030 and 2050. According to the European Commission, the performance indicators they provide “will help companies, project promoters and issuers access green financing to improve their environmental performance, as well as helping to identify which activities are already environmentally friendly.” The goal with this approach is to help grow low-carbon sectors and to decarbonise the high emitters.
How the EU Taxonomy works
As a part of the EU Green Deal, the EU Taxonomy is supposed to contribute to the EU’s ambitious climate goals. For that matter, the EU Commission formulated six climate and environmental objectives. A company's business activities must contribute to at least one of the objectives in order to be considered economically sustainable. The goals are as follows:
In order for an economic activity to be considered sustainable and “taxonomy aligned” it has to meet the following science-based criteria:
- Make a substantial contribution to one of the six environmental objectives
- Do no significant harm to the other five objectives
- Meet minimum safeguards (e.g., OECD Guidelines on Multinational Enterprises; The UN Guiding Principles on Business and Human Rights)
Who is affected by the EU Taxonomy - and who will be?
The taxonomy report states three different groups of users for whom it will be mandatory to comply with the taxonomy regulation. The groups are as follows:
- Large companies with over 500 employees and more that are already required to report non-financial information under the scope of the Non-Financial Reporting Directive (NFRD)
- The EU and Member States when setting public measures, standards or labels for green financial products or green bonds
- Financial market participants that offer financial products in the EU
The EU Taxonomy can also be used voluntarily and can serve as a guidance for investors.
Even if your company is currently not affected, this might change as the EU Commission will extend the current mandatory reporting to other types of companies and sectors. With the introduction of the new Corporate Sustainability Reporting Directive (CSRD), for example, the EU Taxonomy will most likely become mandatory also for companies with over 250 employees.
In the following graph you can find out whether your company is affected by the EU Taxonomy or will be in the future:
Timeline: When do companies have to disclose?
Financial market participants:
The first set of disclosures (activities that substantially contribute to climate change mitigation and/or adaptation) are due by 31 December 2021. An expanded set of disclosures (activities that substantially contribute to all 6 environmental objectives) are due by the end of 2022. Disclosures have to be made in periodic reports, pre-contractual disclosures and on websites.
The first set of disclosures (activities that substantially contribute to climate change mitigation and/or adaptation) will be due in the course of 2022, covering the financial year 2021. An expanded set of disclosures (activities that substantially contribute to all 6 environmental objectives) are due in the course of 2023, covering the financial year 2022.
How to get started?
In order to be prepared for the EU Taxonomy and its performance thresholds, companies should figure out what data they need, how to analyse and how to report on it.
Is your company affected by the EU Taxonomy regulation, but you are uncertain how to get started to align your business with those new requirements? Don’t hesitate to contact us today - one of our sustainability experts is happy to help.