To ensure a smooth transition to a low-carbon financial and economic system and to prepare for climate-related risks, companies must develop and implement appropriate management measures. A scientifically sound, forward-looking disclosure of climate-related data is key, enabling the identification, assessment, and appropriate response to climate change-related impacts. To show that their economic activities are environmentally sustainable following the classification system of the EU Taxonomy Regulation, companies must meet certain thresholds and criteria, e.g., for proof of a substantial contribution to one of the six environmental goals established by the EU Taxonomy Regulation.
Currently, however, companies primarily still focus on disclosing historical CO2 emissions within the topic of climate mitigation, leaving notable gaps in the incorporation of forward-looking climate data and scenarios into reporting and long-term (adaptation) planning strategies. Establishing an early policy framework providing planning certainty is expected to facilitate the necessary reallocation of assets without disrupting or inflicting adverse consequences on the financial system, which could result from a belated and abrupt transition to a climate change trajectory well below the global warming limit of 2°C.
The Sustainable Finance Disclosure Regulation (SFDR) governs disclosure obligations within the financial services sector, while the Corporate Sustainability Reporting Directive (CSRD) mandates sustainability information disclosure for companies. To ensure consistent definitions, the EU Taxonomy Regulation establishes a system for classifying environmentally sustainable economic activities and imposes disclosure requirements on both companies and financial market participants. Consequently, it serves as a bridge between these two realms.
The EU Taxonomy Regulation classification system serves two primary purposes: a) providing clarity to companies and financial market participants on economic activities deemed as being environmentally sustainable; and b) enabling investors to identify and invest in sustainable assets. The EU Taxonomy Regulation aims to redirect capital towards sustainable activities, incentivizing companies to initiate new projects or expand existing ones.
Furthermore, it supports the transformation of the European economy and facilitates the achievement of the European Green Deal objectives by incorporating six environmental objectives, including, amongst others, climate change adaptation on equal footing with climate mitigation and four corresponding requirements for business activities to be recognized as environmentally sustainable within the taxonomy framework.
The EU Taxonomy Regulation can be a pivotal tool for fostering corporate adaptation to the impacts of climate change by calling for the integration of future climate change into corporate strategies. By setting general criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change adaptation and for determining whether that economic activity causes no significant harm to it, the regulation provides a structured framework for businesses to assess and improve their preparedness for impacts of climate change.
The consideration of the requirements of the EU Taxonomy Regulation ensures that corporate strategies should be scientifically grounded and well-prepared for the challenges posed by climate change. Furthermore, it promotes transparency and accountability. By requiring companies to disclose their fulfillment of the adaptation criteria, it enhances investor and stakeholder confidence.
This transparency can contribute to greater competitiveness and resilience in the face of climate change. By getting businesses on course with the EU’s environmental goals and climate science, the EU Taxonomy Regulation also encourages a holistic approach to addressing climate change, promoting resilience and adaptation alongside mitigation efforts.
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