What is the EU Taxonomy?
The EU Taxonomy is a framework to facilitate sustainable investment and was established to fulfill the EU´s environmental objectives. It is a regulatory classification tool that helps investors, companies, and financial institutions to define a standardized understanding of which economic activities can be considered environmentally sustainable. The overarching goal of the EU Taxonomy is to transform markets by redirecting capital flow towards environmentally sustainable activities. The classification tool of the EU Taxonomy prevents “greenwashing” attempts by increasing the transparency of corporate activities and clarifying their environmental performance.
For whom is the EU Taxonomy mandatory?
Reporting of economic activities with regard to sustainability is only mandatory for two key groups: financial market participants offering financial products within the EU and UK as well as large public interest companies (more than 500 employees + balance sheet over EUR 20 Mio. or net turnover over EUR 40 Mio.). Any other market participant can use the EU Taxonomy voluntarily.
What needs to be disclosed?
Financial market participants:
Financial market participants offering financial products that relate to one of the six environmental objectives are required to disclose:
- Information on the environmental objective(s) the particular investment is contributing to
- Information on the extent to which the underlying investments are sustainable (including the percentage of investments in sustainable economic activities).
For financial products that do not contribute to any of the six environmental objectives, financial market participants are obliged to carry out a negative disclosure statement.
Large public-interest entities
Large public-interest entities are required to disclose in non-financial statements (either annual report or dedicated sustainability report) whether and to which extent their economic activities are environmentally sustainable. This is especially important for capital as well as operating expenditures. If companies are not in line with the EU Taxonomy classification criteria, they are obliged to disclose a negative statement.
How does the EU Taxonomy define sustainable activities?
According to the EU Taxonomy, a sustainable economic activity is defined as:
- Contributing substantially to at least one of the six environmental objectives, which are:
- 1 Climate change mitigation
- 2 Climate change adaptation
- 3 Sustainable 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
- Doing no significant harm (DNSH) to any of the other environmental objectives
- Complying with minimum social safeguard standards (OECD´s guidelines for multinational enterprises, UN´s Guiding Principles on Business and Human Rights)
- Complying with technical screening criteria developed by the Technical Expert Group (TEG), applicable for financial market participants by the 31st of December 2021 and companies in the course of 2022 for the first two environmental objectives (climate change mitigation and adaptation). Disclosure for all environmental objectives will be required by the end of 2022.
Further, the EU Taxonomy distinguishes between three types of economic activities:
- Own performance: Activities that are low carbon(very low or zero emissions)
- Enabling activities: Activities that enable other activities to contribute to low-carbon performance or substantial emissions reductions
- Transitional activities: Activities that contribute to a transition to a net-zero emissions economy in 2050 but are not yet close to net-zero emissions
What has happened so far and what is still to come?
- EU Taxonomy published: 22. June 2020
- So far, the technical screening criteria cover only two out of six environmental objectives. Technical screening criteria for activities that contribute to the other four environmental objectives, which are water, a circular economy, pollution prevention and control, and protection of ecosystems will be issued by the end of 2021
- By 1 June 2021, the European Commission will adopt a delegated act specifying how the corporate disclosure obligations should be applied in practice
The EU Taxonomy in practice
The disclosure should act as a roadmap for companies, investors, and financial institutions to classify which economic activities are environmentally sustainable. So far, companies can count the turnover and capex/opex for climate change mitigation, while climate change adaption only covers the turnover and capex/opex (exceptions are climate change adaption enabling activities).
Financial market participants are obliged to disclose in their periodic reports, pre-contractual disclosures, and on their websites:
- by 31st December 2021: “climate change mitigation” and “climate change adaptation”
- by 31 December 2022: all six environmental objectives
Large corporate interest companies are obliged to make their disclosure in a non-financial statement with their annual reports or a dedicated sustainability report
- during 2022: “climate change mitigation” and “climate change adaptation”
- by 31 December 2023: all six environmental objectives
Sources:
[1] European Commission 2020: https://ec.europa.eu/info/files/200309-sustainable-finance-teg-final-report-taxonomy_en
[2] European Commission 2020: https://ec.europa.eu/info/files/200309-sustainable-finance-teg-final-report-taxonomy-annexes_en
