Who is the EU taxonomy for and what are the benefits of aligning to it?

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EU taxonomyThe 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.

As of January 1, 2022, the European taxonomy has partially been implemented within the European Union for more than 11,000 organisations (financial institutions, companies, and States). This regulation plans to extend the non-financial mandatory reporting for financial and non-financial organisations.

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 100 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 90 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?

The green taxonomy is currently aimed at more than 11,000 organisations:

  • Financial institutions and large companies with more than 500 employees (with a balance sheet of more than 20 million Euros or a turnover of more than 40 million Euros) which are already required to provide a declaration of extra-financial performance (DPEF) under the Non-Financial Reporting Directive
  • The organisations that use this information: financial market players, financial supervisory institutions (such as central banks) as well as all Member States when they establish public measures, standards or labels for green financial products or green bonds.

This year, large companies with more than 500 employees and financial institutions must publish the share of their activities and/or investments eligible for the taxonomy. From 2023, large companies will also have to publish the alignment of their activities with the taxonomy.

For 2023 reporting (to be published in 2024), this will be extended to 50,000 organisations within the framework of the Corporate Sustainability Reporting Directive (CSRD):

  • Large companies with more than 250 employees (with a balance sheet of more than 20 million euros or a turnover of more than 40 million euros)
  • All listed companies, except listed micro-enterprises. Listed SMEs may be subject to the taxonomy in 2026.

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 defined by the Technical expert group on sustainable finance (TEG) :
        1. Climate change mitigation: the impact of an organisation on the environment
        2. Climate change adaptation: the impact of the environment on the organisation
        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, the delegated act has only detailed the criteria for the first two environmental objectives but those for the other four objectives will be published soon.
  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:

EU Taxonomy graphic

What are the benefits of aligning to the EU taxonomy?

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

CompaniesInvestorsSociety
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?

  • Q1 2022: publication of the four remaining delegated acts on the alignment of other environmental criteria (pollution, water, circular economy and biodiversity)
  • By July 2022: publication of the application report
  • January 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; implementation of the CSRD which extends the non-financial reporting obligations, including alignment with the European taxonomy, 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.

 

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