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The EU Green Taxonomy is a framework that defines which economic activities can be classified as environmentally sustainable. It sets out criteria and requirements for determining whether a specific activity contributes to environmental objectives, such as climate change mitigation or biodiversity protection. The taxonomy aims to provide clarity and transparency to investors, businesses, and consumers by establishing a common language for sustainable finance and investment.
In this article, we will have a look at the EU Green Taxonomy and explain what it means for EU businesses.
The EU Taxonomy Regulation is part of the ‘Action Plan on Financial Sustainable Growth’, presented by the EU Commission in 2018. Introduced with the intent of reducing the ‘Green Washing’ of financial products while incentivizing private investment in green and sustainable projects.
The regulation proposes criteria to determine the environmental sustainability of an economic activity, hence providing a measure of the environmental sustainability of an investment.
In general, all companies that are subject to the CSR Directive are obliged to report.
These selected industries are affected by the EU taxonomy:
Attention: The CSR Directive is currently being updated and will in future apply to 40,000 more companies than before. See our article on the CSRD.
Future scope of the report will include information on how and to what extent the company’s activities are linked to environmentally sustainable and thus “taxonomy-aligned” activities.
Going forward, the regulation will also be relevant to companies that want to raise capital on the financial markets. With the Sustainable Finance Disclosure Regulation and the Taxonomy requiring investors to provide information on their investment’s sustainability, it is likely that the Taxonomy will be used as the basis for these assessments.
These use cases are being actively considered in the development of the EU Ecolabel for financial products and the Green Bond Standard.
The Taxonomy Regulation states that an economic activity is considered taxonomy-compliant if it makes a significant contribution to at least one of six environmental objectives without running counter to the others (Do No Significant Harm - DNSH). Simultaneously, certain minimum requirements must be met, e.g., with regard to social and human rights.
The environmental objectives of the taxonomy are:
Companies must demonstrate this by publishing what percentage of their sales are taxonomy compliant and what percentage of CAPEX and OPEX are taxonomy compliant.
Companies covered by the CSR Directive will have to report on their compliance with the taxonomy for the first time in 2022 for the calendar year 2021.
The biggest challenge is the collection of the necessary data within your company and subsidiaries to classify the conformity of your economic activities with the taxonomy. This represents a major bureaucratic effort.
Together with experts from renowned large, medium-sized and small companies with experience in sustainability reporting, we have developed a software solution that makes it much easier for you to implement the new regulation.