The EU taxonomy forms the backbone of the EU’s sustainable finance strategy, acting as a vital tool for enhancing market transparency. Its primary role is to guide investments towards key economic activities necessary for the transition to sustainability, aligning with the goals of the European Green Deal. Essentially, this taxonomy is a detailed classification system that outlines criteria for economic activities that support a net-zero emissions pathway by 2050 - among other environmental objectives.
To meet the EU’s 2030 climate and energy targets and the broader goals of the European Green Deal, it is crucial to channel investments into sustainable projects and activities. Achieving this requires a shared language and a clear definition of ‘sustainable’ activities. The EU taxonomy provides a common framework for both financial and non-financial entities to identify and define environmentally sustainable economic activities.
This common understanding is essential for scaling up sustainable investments across the EU. It enhances investor confidence, protects against greenwashing, helps companies improve their environmental performance, and reduces market fragmentation. The Taxonomy Regulation, effective from July 12, 2020, establishes the EU taxonomy by setting four key conditions that economic activity must meet to be deemed environmentally sustainable.
The European Commission, under this regulation, was responsible for listing environmentally sustainable activities by setting technical screening criteria for each environmental goal through delegated and implementing acts. The formulation of an effective and unified strategy is contingent upon the establishment of a proper data structure.
Data collection should be conducted as per the Taxonomy to periodically ascertain the degree to which the business goals and objectives correspond with those of the EU Taxonomy. After analyzing and understanding the gathered data, enterprises should determine whether their activities fall under the EU Taxonomy.
Businesses are advised to compute pertinent environmental metrics and figures to fulfill reporting requirements under the EU Taxonomy Regulation. Moreover, enterprises should engage in benchmarking exercises with industry peers to gain insights into their positioning within the broader business landscape. This step is crucial as the EU Taxonomy fosters increased transparency and comparability among peers. Investors will have access to each organization's disclosures, underscoring the importance of assessing whether the organization is leading or lagging in sustainability efforts.
In November 2023, the Commission tentatively approved a new set of EU Taxonomy criteria targeting economic activities that significantly contribute to various non-climate environmental objectives, including sustainable water and marine resource management, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems.
Additionally, the Commission introduced targeted revisions to the EU Taxonomy Climate Delegated Act, expanding the scope to include economic activities related to climate change mitigation and adaptation, particularly within the manufacturing and transportation sectors. Encompassing a broader spectrum of economic activities across all six environmental objectives and, consequently, more economic sectors and companies, will enhance the usability and potential impact of the EU Taxonomy in promoting sustainable investments within the EU.
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