European Taxonomy Regulation Simplified | Why, What and How of the European Taxonomy Regulation?

Introduction

The EU Taxonomy Regulation represents a significant step towards sustainable finance in the European Union. It establishes a classification system to identify environmentally sustainable economic activities, facilitating sustainable investment decisions in various sectors.

What is the EU Taxonomy?

The EU Taxonomy is a comprehensive system categorizing environmentally sustainable economic activities. It provides clear, consistent guidance for businesses and investors, aligning financial choices with environmental objectives.

Key Components of the EU Taxonomy

The Taxonomy is built around six environmental objectives: climate change mitigation and adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and the protection of healthy ecosystems. Each objective has specific criteria for activities to be classified as sustainable.

Do No Significant Harm Principle

A core principle of the EU Taxonomy is the "Do No Significant Harm" (DNSH) principle. It mandates that an activity must not significantly harm any of the environmental objectives to qualify as sustainable.

Significance for Businesses

Compliance with the Taxonomy opens up sustainable finance opportunities, like green bonds and loans. It boosts a company's reputation, attracts responsible investors and customers, and helps identify and minimize environmental risks.

Significance for Investors

The Taxonomy aids investors in making informed decisions based on a company’s sustainability disclosures. It aligns investment portfolios with environmental, social, and governance objectives and mitigates risks associated with environmental issues and changing regulations.

Taxonomy Reporting Requirements

The Taxonomy amends the EU’s Non-Financial Reporting Directive (NFRD) and the Sustainable Finance Disclosure Regulation (SFDR). It requires entities to disclose the degree of alignment of their activities with the Taxonomy, including proportions of turnover, capital expenditure, and operating expenditure linked to sustainable activities.

Enabling & Transitional Activities

The Taxonomy defines 'enabling activities' that aid others in achieving environmental objectives, and 'transitional activities' that contribute to climate change mitigation, provided they meet certain criteria.

Timeline and Future Developments

The Taxonomy became effective on 12 July 2020, with ongoing development of specific technical screening criteria. Future expansions may include classifications for activities with neutral or harmful environmental impacts and social objectives.

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