The EU taxonomy is one of the most significant advances in the field of sustainable finance. As its implementation begins, EcoAct expert, Jordan Hairabedian updates us on what the taxonomy is, who needs to align to it and the benefits it can deliver.

For the first time in 2023, companies with more than 500 employees subject to the Non-Financial Reporting Directive (NFRD) must publish their alignment analysis to the EU taxonomy. In this article, we examine of this new European regulation which extends the extra-financial reporting obligations for 11,000 financial and non-financial actors.

What is the EU taxonomy?

Under the European Green Deal, the European Union has taken important decisions to build a sustainable finance ecosystem. This is because 1000 billion Euros needs to be mobilized between 2021 and 2027 to achieve the low-carbon transition of the 27 member countries. One of the main objectives of the taxonomy then is to help identify and promote investments in sustainable activities to enable the EU to achieve net-zero by 2050.

This taxonomy is central to the EU’s net-zero drive. It is a standardised classification of economic activities contributing substantially to the achievement of environmental objectives according to scientific criteria. It allows the sustainability assessment of 107 economic activities, representing more than 93% of greenhouse gas (GHG) emissions in the EU, according to different levels:

• Activities that are already considered low carbon and compatible with the Paris Agreement (example: zero-net emissions transportation)
• Activities that contribute to the transition to a net-zero economy in 2050 despite both economic and technological obstacles (e.g. building renovation)
• Activities that enable the “greening” or reduction of emissions from other activities, such as the development of technologies that lead to substantial emission reductions in other sectors (e.g. wind turbine manufacturing plant)

Who is the EU taxonomy for and when must they report?

The Green Taxonomy currently covers over 11,000 companies. However, with the implementation of the new Corporate Sustainability Reporting Directive (CSRD) from 2024, its scope will gradually be extended to 50,000 organisations. Taxonomy reporting must be done annually, in the non-financial statement or in a separate report until 2024 and in the management report from 2025.

How to align with the European green taxonomy?

1. First, not all economic activities are covered by the taxonomy. An alignment analysis must therefore start with an eligibility analysis (compulsory from 2022). It is a correspondence of the activities included in the taxonomy against the activities of the organisations and the investments (in % of turnover, investment expenditure – CAPEX – and operating expenditure – OPEX).
2. To align with the taxonomy, organisations’ economic activities must contribute to at least one of the six environmental objectives :
   1. 1. 1. Climate change mitigation: the impact of an organisation on the environment
         2. Climate change adaptation: the impact of the environment on the organisation. For this objective, our experts and climatologists have developed our climate risk analysis platform to determine sites exposure to the 28 climate hazards defined by the European Taxonomy.
         3. Use and protection of water and marine resources
         4. Transition towards a circular economy
         5. Pollution prevention and control
         6. Protection and restoration of biodiversity and ecosystems.
3. This contribution must be made without undermining the other objectives mentioned above. An economic activity aligned with the taxonomy will also have to comply with qualitative and quantitative criteria specific to each objective (methodologies and thresholds).To date, two delegated acts have been finalised detailing the criteria for activities with a substantial contribution to climate (mitigation and adaptation) as well as the criteria for nuclear and natural gas activities. A public consultation is open until the beginning of May 2023 to define the criteria for activities that have a substantial contribution on water, pollution, circular economy and biodiversity.
4. For an activity to be considered green, it will also be necessary that it respects labour and social rights.
5. Finally, the data is consolidated. If criteria 2), 3) and 4) are validated, the activity or investment in question is qualified as sustainable in the context of non-financial reporting.

Example benefits of the EU taxonomy

Thanks to the taxonomy, an investor (asset owner or asset manager) will now be able to determine exactly what is the green share of their portfolio (the share of the turnover of the underlying assets that contributes to the transition). They will be able to easily compare the contribution of their different investment portfolios to the low-carbon and resilient transition.

Another example, in the electricity and cement production sectors, eligibility thresholds will be defined as follows:

What are the benefits of aligning to the EU taxonomy?

The taxonomy has many advantages for organisations, investors and for our global society:

Companies	Investors	Society
Easier to demonstrate your contribution to the low-carbon and resilient transition Plan and raise funds by developing green investments Avoid involuntary greenwashing	Provide a robust classification system for investment Have a better understanding of risk and opportunities regarding your investment portfolio Avoid reputation risks related to activities that undermine environmental objectives Express expectations for investment decisions	Translate the Paris Agreement commitments and the Sustainable Development Goals by identifying activities that can be considered green Provide a common language to all economic actors Ensure financial flows towards sustainable activities even if it is not currently mandatory to invest in activities eligible for the taxonomy

 

What’s next for the EU taxonomy?

• Q4 2022 – Q1 2023: publication of the four remaining delegated acts on the alignment of other environmental criteria (pollution, water, circular economy and biodiversity)
• From 2023: application of the texts concerning the other environmental objectives (pollution, water, circular economy and biodiversity); taxonomy alignment reporting obligation for large companies
• From January 2024: taxonomy alignment reporting obligation for financial institutions
• Froom 2025: progressive taxonomy scope extension due to the implementation of the CSRD to 50,000 companies

The taxonomy will be reviewed every three years to best respond to technological and scientific evolutions as well as new activities.

The EU taxonomy is one of the most significant major advances in the field of sustainable finance and will undoubtedly serve as an international reference.

To find out more about the different reporting frameworks you can align yourself with, check out our e-Book which outlines the main frameworks.