According to Kermit the Frog, it’s not easy being green. But the Intergovernmental Panel on Climate Change (IPCC) tells us we have no choice. Luckily, the European Commission has been working on a clever way to make being green easier: the EU Taxonomy, a classification system for sustainable activities. This taxonomy is a list of environmentally sustainable economic activities that companies, investors and policymakers can use to steer decision-making. It’s part of a larger plan to respond to the climate emergency.
The EU’s Climate Change Agenda
The EU has set enormous ambitions for itself when it comes to sustainability. We've all heard of the European Green Deal. The EU Green deal is a series of actions and programmes to achieve net-zero greenhouse gas emissions by 2050. It aims to foster economic growth, decoupled from resource use, with no person and no place left behind. At the same time, it seeks to achieve post-COVID19 economic recovery.
One third of the 1.8 trillion euro NextGenerationEU Recovery Plan, and the EU’s seven-year budget will be used to finance the European Green Deal. One third of 1.8 trillion sounds like a lot of money, but it is not enough to finance the transition towards a sustainable economy in Europe. Companies and investors must also shift their spending towards sustainable projects and activities. That’s where the new taxonomy comes in.
Having common definitions of what constitutes sustainable economic activities has many benefits:
- It creates clarity for investors
- It “prevents” greenwashing
- It helps companies become more climate-friendly and mitigate market fragmentation
- It steers investments towards sustainable initiatives which will contribute to sustainability goals
What are these sustainability goals exactly?
The EU Taxonomy establishes six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
Defining sustainable economic activities
According to the EU Taxonomy, an economic activity qualifies as environmentally sustainable if it meets four conditions:
- It’s substantially contributing to at least one of the six environmental objectives listed above.
- It does no significant harm to any of the environmental objectives. If you achieve one of the environmental objectives, but harm one or more of the other five, your activity is not sustainable.
- It complies with minimum social and governance safeguards. Economic activities must align with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
- It complies with the Technical Screening Criteria, which can be found here.
It’s a landmark piece of regulation
Although the EU Taxonomy regulation and the technical screening criteria didn't get as much attention as GDPR for instance, it is a very important piece of legislation. Coupled with the Sustainable Finance Disclosure Regulation (SFDR) and the recently published Corporate Sustainability Reporting Directive (CSRD), these new regulations will drive sustainability efforts for a long time. And not just in Europe.
Does it apply to me?
It depends on your type of business, and on your company size. The EU Taxonomy regulation applies to companies and asset managers within the scope of the NFRD (which will be replaced by the CSRD) and SFDR.
The SFDR applies to asset managers, financial advisers and insurance providers in the European Union. CSRD applies to all large companies and all companies listed on regulated markets, banks, insurance companies and other companies designated by national authorities as public-interest entities. Approximately 48.000 companies in Europe are under the scope of the CSRD.
Understanding the EU Taxonomy and what it means for your business
Visma Connect is one of the world’s leading suppliers of reporting technology. We have created taxonomies for the Dutch Government, The State of Florida, The Dutch public housing sector and banks. Recently, we launched Visma Sustynex. The world’s first cloud native platform for ESG Disclosure based on a GRI taxonomy. We have experts that can help you find your way in taxonomies, sustainability reporting and all kinds of other technologies that will help you report to your stakeholders and regulatory authorities. Contact us to continue the conversation.