Introduction to EU Taxonomy
EU Taxonomy plays a significant role in promoting sustainable finance, encouraging companies to adopt sustainable practices, and providing investors with a standardized framework for assessing the environmental performance of their investments. By setting clear criteria for environmentally sustainable activities, the EU Taxonomy aims to drive the transition to a greener and more sustainable economy in Europe.
The EU Taxonomy is a framework developed by the European Union to establish a common language for sustainable finance. It aims to define and classify economic activities that can make a substantial contribution to environmental objectives and support the transition to a sustainable economy. The EU Taxonomy Regulation, which came into effect on July 1, 2021, sets out the criteria and requirements for determining whether an economic activity is environmentally sustainable. Here is an introduction to the EU Taxonomy:
1. Objectives of the EU Taxonomy: The EU Taxonomy serves several purposes, including:
- Facilitating sustainable investment: It provides investors with clear criteria for identifying environmentally sustainable economic activities, helping them make informed investment decisions that align with sustainability goals.
- Encouraging transition to a sustainable economy: The taxonomy encourages businesses to shift towards more sustainable practices by providing a roadmap and benchmarks for environmentally friendly activities.
- Enhancing transparency and comparability: It promotes transparency in reporting and disclosure by requiring companies to disclose the proportion of their activities aligned with the taxonomy's criteria, allowing for better comparability among businesses.
2. Environmental Objectives: The EU Taxonomy focuses on six environmental objectives, known as "environmental performance areas":
- Climate Change Mitigation: Activities that contribute to reducing greenhouse gas emissions and facilitating the transition to a low-carbon economy, such as renewable energy generation and energy-efficient infrastructure.
- Climate Change Adaptation: Activities that enhance resilience to the impacts of climate change, including flood protection measures, water management, and climate-resilient infrastructure.
- Sustainable Use and Protection of Water and Marine Resources: Activities related to sustainable water management, wastewater treatment, and sustainable fishing practices.
- Transition to a Circular Economy: Activities that promote resource efficiency, waste prevention, recycling, and the use of secondary raw materials.
- Pollution Prevention and Control: Activities that aim to prevent pollution, including air and water pollution control, waste management, and environmentally friendly product design.
- Protection and Restoration of Biodiversity and Ecosystems: Activities focused on biodiversity conservation, habitat restoration, and sustainable land use practices.
3. Taxonomy Criteria: The EU Taxonomy establishes technical screening criteria to determine whether an economic activity substantially contributes to one or more of the environmental objectives. These criteria assess the activity's impact on greenhouse gas emissions, resource use, pollution, and other relevant factors.
4. Application: Initially, the EU Taxonomy applies to certain sectors considered highly relevant to sustainability, such as energy, manufacturing, transportation, and agriculture. Over time, the taxonomy is expected to expand to cover more sectors of the economy.
5. Reporting and Disclosure: The taxonomy requires companies falling under its scope to disclose the proportion of their activities that are environmentally sustainable, using a prescribed reporting format. This enables investors, stakeholders, and the public to assess the environmental performance and sustainability commitments of companies.
6. Future Developments: The EU Taxonomy is an evolving framework, subject to regular review and updates. The taxonomy is expected to expand to address other sustainability objectives, such as social objectives, in the future.
