UNDERSTANDING THE EU TAXONOMY

The recent global shifts in environmental, social, and corporate governance have amplified the urgency for governments, investors and businesses across the globe to prioritize sustainable investments to achieve a climate-neutral economy by 2050. One of the most pivotal developments in sustainable investments is the European Union’s Taxonomy, also known as the Taxonomy Regulation. This innovative attempt by the EU seeks to establish a unified system to categorize economic activities. The EU Taxonomy’s roots lie in the increasing global awareness of climate change and the consequential need to transition towards a low-carbon, resilient, and resource-efficient economy.

In this article, we provide an overview of the EU Taxonomy and what it can mean for your organization.

WHAT IS THE EU TAXONOMY?

Simply put, the EU Taxonomy is a classification system. It outlines a clear framework for what can be considered an environmentally sustainable economic activity. The goal of this regulation is to guide investments towards the economic activities that are environmentally friendly and aligned with the objectives of the European Green Deal.

As per the Taxonomy Regulation, the Commission was required to create the list of environmentally sustainable activities by establishing technical screening criteria for each environmental objective through delegated acts. By doing so, this progressive reporting requirement will ensure that businesses are taking concrete steps toward greater environmental sustainability.

With the implementation of this regulation, companies falling under the scope of the Corporate Sustainability Reporting Directive (CSRD) have to report in their annual reports to what extent their activities are covered by the EU Taxonomy (Taxonomy-eligibility) and comply with the criteria set in delegated acts.

WHAT IS A SUSTAINABLE ECONOMIC ACTIVITY UNDER THE EU TAXONOMY?

For a business to earn the label of a sustainable economic activity under the EU Taxonomy regulation, it must fulfill a set of specific conditions. The parameters for determining an economic activity’s sustainability are guided by four criteria:

The economic activity must play a part in achieving at least one of the six environmental objectives.
The activity must also ensure ‘no significant harm’ (DNSH) comes to any environmental objectives, reinforcing a holistic approach to sustainability.
The activity must uphold ‘minimum safeguards’ like the UN Guiding Principles on Business and Human Rights. This requirement guarantees that pursuing environmental sustainability doesn’t lead to adverse social consequences.
The activity must adhere to the technical screening criteria crafted by the EU Technical Expert Group, establishing a consistent and clear standard for all.

The Taxonomy has also introduced two categories that significantly contribute to one or more environmental objectives: “enabling activities” and “transitional activities.” These categories are essential as they permit the inclusion of activities that might not typically be deemed sustainable, thereby supporting the broader aim of encouraging sustainability.

Enabling activities serve as facilitators, helping other activities significantly contribute to at least one of the Taxonomy’s six environmental objectives (Climate change mitigation, Climate change adaptation, Sustainable use and protection of water and marine resources, Transition to a circular economy, Pollution prevention and control, Protection and restoration of biodiversity and ecosystems). They must ensure a substantial positive environmental impact over their lifecycles.

Transitional activities are those that mitigate climate change. To qualify as transitional activities, these criteria must be met:

No technological or economically viable low-carbon alternatives are available.
The Green House Gas emissions levels should represent the best performance within a given industry.
The activities do not result in carbon lock-in, and they cannot prevent development and deployment of low-carbon alternatives.

Learn more about our Carbon tracking Solution

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WHO DOES THE EU TAXONOMY APPLY TO?

Under Article 8 of EU Taxonomy regulation, companies based in EU member states or operating a European legal entity with more than 500 employees will have a legal obligation to report, including disclosing the percentage of turnover, CapEx and OpEx that is Taxonomy-eligible and aligned. The EU Taxonomy Navigator can provide all the details you need.

STEPS TO COMPLY WITH THE EU TAXONOMY

If you determine that Taxonomy reporting is applicable to your organization, enlist the help of third-party experts, such as EU Taxonomy consultants or reputed accounting firms that understand the regulation, to identify exactly what you need to report on.

Once you know which activities you will have to collect data about, work with your team to discover the data you actually have, its quality, and if there are any gaps. This process is critical so that you implement processes and technology solutions to facilitate your reporting.

For example, OPTEL’s OptchainTM end-to-end traceability platform for sustainable supply chains can be critical in enabling your business to measure and track your supply chain’s environmental footprint, sourcing performance, and gaining control over your data that will reflect your Taxonomy alignment and eligibility.

EU TAXONOMY TIMELINE

Stemming from the EU Sustainable Finance Action Plan and Green Deal in 2018, this initiative comes as a response to the lack of consensus and definition around what sustainable or green investments actually mean. The EU Taxonomy Regulation was officially adopted in June 2020 and you can view the complete policy timeline here. It is important to keep in mind that the regulation is constantly evolving.

As of January 2022, reporting has begun with non-financial entities with major activities in the EU reporting Taxonomy eligibility for 2021. Similar reporting will be required for 2023 and beyond. Financial institutions will have to begin reporting Taxonomy alignment for their investments as of 2024. At OPTEL, we recommend exploring the EU Taxonomy Navigator to get more details on your legal obligations and deadlines.

NEXT STEPS FOR THE EU TAXONOMY

Currently, there are technical screening criteria in place for only two environmental objectives: ‘climate change mitigation’ and ‘climate change adaptation.’ However, it is anticipated that these criteria will eventually be extended to encompass the remaining four environmental objectives.

In the interim period, while we await the implementation of the new Taxonomy Delegated Acts, the EU Taxonomy bridges the gap between the economy and the environment. It is ushering in a new era where financial growth and environmental stewardship are no longer separate entities but intertwined. The EU Taxonomy promises to be a viable roadmap for building a future where the economy serves the environment—not the other way around.

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