What exactly does the much-discussed term EU Taxonomy mean?
It is a common vocabulary to help investors decide which activities are sustainable and which are not. Companies whose activities are in line with the taxonomy open up a wide range of investment opportunities. In this article, we look in detail at the objectives the EU Taxonomy pursues, what criteria it sets and how your company can assess whether it meets its criteria.
What is the EU Taxonomy Regulation?
The European Union has set a target to reduce greenhouse gas emissions by 55% by 2030 and become carbon neutral by 2050. To achieve these goals, it is essential that investments are directed towards sustainable economic activities that are in line with the objectives of the Green Deal for Europe. However, in recent years it has not been easy for investors to distinguish which activities are sustainable. For this reason, the Sustainable Investment Action Plan was created in 2018, highlighting the need for a common vocabulary for investors.
In 2022, the EU Taxonomy Regulation was adopted, creating this common vocabulary based on robust data and science. The EU Taxonomy is a classification system that makes it easier for companies and investors to identify environmentally sustainable economic activities to support sustainable investment decisions.
Environmentally sustainable economic activities are defined as those that make a significant contribution to at least one of the EU's climate and environmental objectives, without seriously harming any of these objectives, while meeting minimum social standards. The EU Taxonomy is not a list in which investors are obliged to invest, nor does it create any ranking of corporate sustainability. It does not impose any mandatory environmental requirements on companies or financial products, and investors have full freedom to choose where they invest their money. The taxonomy also helps attract investment to existing green projects and discourages greenwashing practices.
What are the main objectives and criteria of the EU Taxonomy?
The EU Taxonomy in its current form follows six main objectives that economic activity must contribute to in order to be labelled sustainable:
1. Climate change mitigation
2. Adaptation to climate change
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Prevention and reduction of pollution
6. Protecting and restoring biodiversity and ecosystems
In order to be labelled sustainable, your activities and investments must meet the following four criteria:
1. Make a significant contribution to at least one of the six environmental objectives
2. Not cause significant harm to any of the other five environmental objectives
3. Comply with minimum social standards
4. meet the technical screening criteria set out in delegated acts in the field of taxonomy
What are the basic steps a company needs to take?
The EU Taxonomy is closely linked to a range of other EU legislation, including the CSRD and SFDR. Companies seeking green finance or subject to CSRD obligations must assess whether the EU Taxonomy applies to their economic activities.
How to do this?
Step 1: Assess whether the Taxonomy applies to your business areas. You can do this, for example, by using the aforementioned Taxonomy Compass, where you can find selected activities by NACE classification.
Step 2: Assess whether these activities meet the technical screening criteria. The Taxonomy is linked to the relevant EU delegated acts that set out the criteria for assessing whether an activity contributes to the European sustainability objectives. The guiding principles are (a) a significant contribution to the environmental objectives of the Taxonomy and (b) no significant harm in the other areas monitored. For example, a company that slightly increases the efficiency of an otherwise significantly polluting industrial process cannot then classify this activity as sustainable.
The EU Taxonomy determines that an activity does not meet the 'no significant harm' principle in these areas:
- An activity is significantly detrimental to climate change mitigation if it results in significant greenhouse gas emissions.
- An activity significantly impairs climate change adaptation if it leads to an increase in the adverse impact of current and expected future climate on the activity itself or on persons, nature or assets.
- An activity significantly impairs the sustainable use and protection of aquatic and marine resources if it damages the good status or good ecological potential of water bodies, including surface water and groundwater, or the good environmental status of marine waters.
- The activity is significantly detrimental to the circular economy, including waste prevention and recycling, if it leads to significant wastefulness in the use of materials or in the direct or indirect use of natural resources, or if it contributes significantly to the generation, incineration or disposal of waste, or if the long-term disposal of waste may cause significant and lasting damage to the environment.
- The activity significantly impairs pollution prevention and control if it leads to a significant increase in the emission of pollutants into the air, water or soil.
- An activity significantly impairs the conservation and restoration of biodiversity and ecosystems where it significantly impairs the health and resilience of ecosystems or the conservation status of habitats and species, including those of Union interest (Source: Ministry of industry and trade).
Step 3: Check that you meet minimum social standards. Sustainability is not only based on environmental but also on social foundations. In this step, it is essential to assess whether you meet minimum social safeguards. The Taxonomy Regulation stipulates that companies and financial institutions must put in place procedures to ensure that their activities comply with international business and human rights principles.
Step 4: Report correctly. The European Taxonomy Regulation stipulates that companies falling under the scope of the NFRD/CSRD must disclose the proportion of environmentally sustainable economic activities that comply with the European Taxonomy criteria.
For non-financial companies, these are the following KPIs:
Turnover
Capital expenditure (CapEx)
Operating expenditure (OpEx)
For financial companies, the KPIs are:
Green Asset Ratio/Green Investment Ratio
How can Green0meter help you?
EU Taxonomy is a tool used by banks and financial institutions to assess their portfolios and determine their green investment ratio. In this way, they meet the EU Taxonomy's objectives, plan a sustainable transformation and raise funds for its implementation. Czech and European companies should see the EU Taxonomy as a tool that can help them obtain financing in the future.
Green0meter will help you navigate the EU Taxonomy Compass, distinguish your company's activities by NACE codes, conduct a series of interviews and prepare selected case studies. We will help you map your company's activities, compile a list of activities suitable for taxonomy evaluation and identify those that are in line with the taxonomy. As a final step, we will help you map capital and operating expenditure and turnover. This will prepare you to report on the proportion of sustainable economic activities in relation to the overall business, differentiate yourself from competitors and prepare for dialogue with investors.
Do you want to know how your company meets the EU Taxonomy requirements? Contact us!
