What is the EU taxonomy?

The EU Taxonomy is a green classification system that divides the EU's climate and environmental objectives into specific & universal criteria. This clarifies the extent to which economic activities can be considered environmental and sustainable. Thus, the EU taxonomy determines which economic activities are best suited to achieve the EU climate goals and in which should preferably be invested.

Economic activities are recognized as "green" or "environmentally sustainable" if they make a significant contribution to at least one of the EU's climate and environmental objectives, while not significantly compromising any of these objectives, and meet minimum social standards. The criteria and standards are set out in the delegated acts on the taxonomy.

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What is the EU taxonomy for & what are its objectives?

As presented by the European Commission, the EU Taxonomy serves as a reliable tool that provides guidance to investors and supports companies in the transition to carbon neutrality and a sustainable economy.

‍Theregulation pursues a total of 6 objectives:

1. Climate protection
2. Adaptation to climate change
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems (1)

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Who is affected by the EU taxonomy?

The EU taxonomy criteria cover the economic activities of 40 % of listed companies, which in turn are responsible for almost 80 % of direct greenhouse gas emissions in Europe (2):

• Large financial and non-financial companies reporting under the NFRD Directive (and from 2024 under the CSRD Directive) must verify the extent to which the economic activities they carry out meet the criteria of the EU taxonomy. More on the NFRD and CSRD Directive here.
• Financial market actors (e.g. asset managers) must disclose the extent to which the activities they finance with their financial products meet the criteria of the EU taxonomy. Companies shall disclose the extent to which they invest and whether the investments qualify as support or transitional activities of the taxonomy. (3)

All companies that are not yet mandatorily affected by the EU taxonomy have the opportunity to deal with it voluntarily and thus position themselves as pioneers in sustainability.

For example, companies can use the criteria of the EU taxonomy as a basis for their environmental strategies and reporting. This enables them to attract potential investors who are particularly interested in green companies. Furthermore, the voluntary willingness to disclose its business activities increases the transparency and credibility of the company among consumers. (4)

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What are the advantages of the EU taxonomy for businesses?

Engaging with the EU taxonomy has several benefits for companies. In addition to increased credibility and potentially gaining new market share, these include:

- an increased investment ratio: investors who attach importance to a sustainable and climate-friendly impact will be specifically interested in those companies that operate on the basis of the EU taxonomy.

- a better interest rate from banks: Banks are also increasingly interested in financing economic activities that go hand in hand with the EU taxonomy. This concerns both better interest rates and the granting of loans. (5)

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How does the taxonomy support the transition to sustainability?

Quite simply, by making the EU taxonomy

1. Provides incentives for companies to improve their environmental performance (either by improving current activities or adding new activities that promote sustainability)
2. Incentivizes investors to invest in green projects, businesses and startups. (6)

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From when does the EU taxonomy apply?

The EU taxonomy came into force on July 12, 2020. Obligated entities will therefore have to report since January 2022. (7)

Although concrete activities have not yet been formulated for most of the EU taxonomy targets and most companies will not have to disclose their sustainability efforts and business activities until the CSRD 2024 comes into force, voluntary engagement and transparency holds a huge market advantage for green pioneers!

Sources:(1),(2), (3), (4), (5), (6), (7)

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