Feb 07, 2023 | Gillian McKee
Being aware of the EU Taxonomy and understanding it and its relevance to your business are not the same thing. So in this blog, we set out answers to some key questions to help you make sense of it all. It’s a timely article, because, although the Taxonomy has been around for a couple of years at this point, in 2023 its use and application will be widened, requiring more environmental disclosures that go beyond climate. Read on as we explain what it is, what's changing and what you need to do to prepare.
What is it?
The EU Taxonomy is an important component of the EU Action Plan on Sustainable Finance created as part of the European Green Deal.
It is a classification system for categorising green business activities, providing a useful tool to help investors, companies and policy-makers in the transition to a low-carbon, resilient and resource-efficient economy.
How does it work?
There are six environmental objectives within the taxonomy:
- Climate change mitigation
- Climate change adaptation
- Sustainability and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention & control
- Protection and restoration of biodiversity & ecosystems
To align with the Taxonomy, economic activities need to meet three key criteria. They must:
- Substantially contribute to at least one of the six environmental objectives detailed above
- Do no significant harm to any of the other five objectives
- Comply with minimum safeguards
The implementation of the Taxonomy is driven by Technical Expert Group (TEG) on Sustainable Finance created by the European Commission. In its final report, the TEG sets out everything you need to know in a lot more detail.
Who does the EU Taxonomy apply to?
The Taxonomy has three distinct audiences:
- Financial market participants offering financial products in the EU, including pension providers
- Large companies with over 500 employees who are currently required to report under the Non-Financial Reporting Directive (NFRD), soon to change to the CSRD.
- The EU and its member states when setting standards or labelling for green products or bonds
The Taxonomy sets technical screening criteria for economic activities in the sectors considered to contribute most to climate change. Manufacturing, transport, buildings, energy and forestry are included for now, but others will follow over time, as the EU Taxonomy grows and develops.
If you’re a large company with operations in Europe and you know the CSRD will apply to you, you should get to grips with the Taxonomy now.
What’s new for 2023?
Until now, large companies have only been required to report disclosures for climate change mitigation and adaptation, but from 2023, they must report against all six objectives of the Taxonomy. Whilst the intention was to apply this widening of criteria from January, no announcement has so far been made, but this is expected at some stage in 2023.
How can it help in the net-zero transition?
In order to achieve its climate goals, the EU needs financial markets to direct capital to projects and companies that can support the net-zero transition.
Assessing economic activities for their ‘green’ credentials requires clarity and consistency and the EU Taxonomy will help provide that. By creating a common language, it will enable the assessment of investments against robust environmental standards to ensure they are consistent with net-zero commitments. It will also help combat the growing scourge of greenwashing.
How can I get ready?
As is increasingly the case with reporting requirements around sustainability, data will be key. Companies will need to determine what data they need against the six objective areas and ensure they are collecting it in a robust and transparent way.
SustainIQ comes into its own in this regard as our software is designed to help companies measure, monitor and report on every environmental topic covered in the EU Taxonomy, along with broader sustainability or ESG criteria.
These measures will have a significant impact, not only within the EU, but far beyond. The EU Taxonomy will be central in shaping the flow of financial investments and the future of the financial markets as we transition to a sustainable economy.
If you need help to prepare and get your data fit and ready for what the Taxonomy will bring, please get in touch.
Related Blogs
As is increasingly the case with reporting requirements around sustainability, data will be key. Companies will need to determine what data they need against the six objective areas and ensure they are collecting it in a robust and transparent way.
SustainIQ comes into its own in this regard as our software is designed to help companies measure, monitor and report on every environmental topic covered in the EU Taxonomy, along with broader sustainability or ESG criteria.