The EU taxonomy has introduced a uniform classification system in which economic activities can be considered environmentally sustainable. Among other things, the taxonomy includes a reporting obligation that affects large and small organizations.
Read on to learn more about the EU's taxonomy and how it will affect you.
What is the EU Taxonomy?
The EU taxonomy stems from the EU's climate strategy, which aims to create a carbon-neutral EU by 2050. One of the preconditions for achieving this goal is an investment in sustainable activities, which is why the EU has set out a standard set of rules on whether and to what extent an activity can be considered environmentally sustainable.
In practice, a classification system based on standard definitions of sustainability enables companies to work on, make visible and communicate sustainability. And not least for investors to distinguish between sustainable and unsustainable investments.
The taxonomy is based on the EU's climate and environment objectives, and its key elements are:
The Six Environmental Objectives
The Taxonomy Regulation has set out six environmental objectives that form the basis of the common language spoken across the EU about environmental sustainability.
The six environmental objectives are:
- Climate change mitigation
- Adaptation to climate change
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protecting and restoring biodiversity and ecosystems
An organization's economic activities must contribute significantly to the above to be classified as sustainable.
The Four Conditions
Four further conditions are set out to define whether an activity can be considered environmentally sustainable.
The four conditions are:
- Contribute positively to at least one of the six environmental objectives
- Meet the "do no significant harm" criteria
- Meet minimum social safeguards
- Meet the technical screening criteria
Technical Screening Criteria
Technical screening criteria have been established for the six environmental objectives, specifying the minimum conditions for economic activity to contribute significantly to an environmental goal.
The minimum conditions must be met and documented before an economic activity can be considered environmentally sustainable.
Regulatory Reporting Requirements
According to the EU taxonomy, organizations and financial institutions must report the proportion of their turnover generated in sustainable business areas.
What Does the EU Taxonomy Mean for you?
The taxonomy will affect more and more companies based in the EU countries because the taxonomy regulation includes reporting obligations for financial institutions.
This means that financial institutions can and will integrate sustainability much more as part of the decision-making process for their investments. It places demands on organizations that, for example, want to finance a construction project, develop a business, etc.
The taxonomy regulation does not cover SMEs directly, but it may still be relevant. For example, if a small business provides goods or services to a reporting organization that needs to raise external financial investment or wants to market itself as a sustainable organization.
Let's take an example.
Financial institutions in the EU have to report against the EU taxonomy and therefore have a clear interest in demonstrating a high proportion of environmentally sustainable investments. In practice, this means that Danish construction companies, for example, must be expected to provide sustainability information in connection with financing - and this affects the entire construction value chain, where even the smallest supplier must address sustainability.
The EU taxonomy will therefore affect both large and small organizations. In the future, therefore, keeping the taxonomy in mind can be a significant competitive advantage for SMEs in particular and differentiate them from competitors.