EU Taxonomy
What is it?
The EU Taxonomy is a classification system that establishes a list of environmentally sustainable economic activities, and this taxonomy is designed to help investors and businesses identify and invest in activities that are aligned with the EU's climate and environmental goals.
The list of the 6 environmentally sustainable economic activities are as follows:
Climate change mitigation
Climate change adaptation
Sustainable use and protection of water and marine resources
Transition to a circular economy, with activities such as recycling and waste prevention
Pollution prevention and control
Protection and restoration of biodiversity and ecosystems
For each of the objectives listed above, the EU Taxonomy identifies a set of criteria that economic activities must meet in order to be considered sustainable.
Here are some specific examples of economic activities that are considered to be sustainable under the EU Taxonomy:
Renewable energy generation
Energy efficiency improvements
Sustainable transportation
Sustainable agriculture and forestry practices
Waste management and recycling
Green buildings
Who is it for?
The scope for EU Taxonomy uses the scope of the EU SFDR and the EU NFRD, simultaneously requiring additional disclosures from financial market participants and large companies to those established in the SFDR and NFRD.
Although not yet entirely disclosed, the requirements for the companies are being phased out over the course of the next few years. Nonetheless, the requirements should disclose and report on their environmentally sustainable activities, and financial market participants will have to disclose how their financial products in the scope of the SFDR are aligning with EU Taxonomy.
These disclosures should be part of the annual NFRD report, which needs to be published alongside the company’s management report. In terms of the companies which fall under the scope of the SFDR, the Taxonomy disclosure should be published in period reviews and pre-contractual disclosures.
The EU Taxonomy is a voluntary system, but it is expected to have a significant impact on investment and business decisions in the EU. Investors are increasingly looking to invest in sustainable activities, and the EU Taxonomy provides them with a clear and concise framework for identifying these activities. Businesses are also using the EU Taxonomy to develop and implement sustainable strategies.
Next steps:
The EU Taxonomy is still under development, but it is already being used by a number of financial institutions and businesses. For example, some banks are using the Taxonomy to develop new financial products that are aligned with the EU's environmental goals.