European Taxonomy: What is it?
Summary
The European Taxonomy is a classification system that defines which investments and economic activities are considered environmentally sustainable. It helps companies and investors direct their choices toward practices that are more environmentally friendly.
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Definition of the European Taxonomy
The European Taxonomy is a classification system created by the European Union to identify economic activities considered environmentally sustainable. It aims to provide a clear and standardized framework for assessing the sustainability of investments. The Taxonomy defines specific criteria to determine which activities significantly contribute to the EU’s environmental objectives. It plays a crucial role in promoting sustainable finance and helps investors direct their funds toward more responsible projects.
Objectives of the European Taxonomy
The European Taxonomy has several objectives to guide investments toward a more sustainable economy:
Facilitate sustainable investments: Provide investors with a clear framework to identify and support economic activities that significantly contribute to the EU's environmental goals.
Improve transparency: Ensure clear and comparable communication of companies' environmental performance, thus reducing the risk of greenwashing.
Promote the energy transition: Encourage companies to adopt more environmentally friendly practices by aligning their activities with the sustainability criteria defined by the Taxonomy.
Support the EU's climate policies: Help the European Union achieve its goals of reducing greenhouse gas emissions and protecting biodiversity.
Strengthen investor confidence: Create an environment where sustainable investments are more easily identifiable and reliable.
Sustainability criteria of the EU Taxonomy
To be eligible under the European Taxonomy, an economic activity must meet several strict criteria. It must contribute substantially to one of the six environmental objectives defined by the EU:
- Climate change mitigation: Reduce or prevent greenhouse gas emissions.
- Climate change adaptation: Increase resilience to the impacts of climate change.
- Sustainable use and protection of water and marine resources: Preserve and efficiently manage water and marine resources.
- Transition to a circular economy: Promote reuse, recycling, and waste reduction.
- Pollution prevention and control: Reduce pollutant emissions into the air, water, and soil.
- Protection and restoration of biodiversity and ecosystems: Conserve and restore natural habitats and species.
Impacts of the European green Taxonomy
On companies
The European Taxonomy directly impacts companies by encouraging them to align their activities with stricter sustainability criteria. Organizations must now assess and report their contribution to the EU’s environmental objectives, which may require adjustments in production processes, resource management, and reporting.
This compliance also offers benefits, such as easier access to sustainable financing and an enhanced reputation among investors and consumers. However, it can also present challenges in terms of compliance costs and administrative complexity.
On investors
The European Taxonomy provides investors with a clear framework to identify sustainable investments and reduce the risk of greenwashing. It allows investors to better assess the sustainability of assets based on strict and scientifically validated environmental criteria. By using the Taxonomy to guide their choices, investors can align their decisions with ambitious environmental goals and meet the growing demand for responsible finance.
Implementation of the European Taxonomy
The implementation of the European Taxonomy is being carried out gradually, with key steps to guide companies and investors. Companies must first assess their economic activities to determine their alignment with the Taxonomy’s sustainability criteria. This involves collecting accurate data and updating internal reporting processes. Organizations can use dedicated tools, such as the D-Carbonize software, to assist with this.
Publicly traded companies and large financial institutions are particularly affected and have been required to integrate these requirements into their annual reports since 2022. Investors, in turn, use the Taxonomy to direct their portfolios toward sustainable assets. This implementation aims to enhance transparency and promote more sustainable practices across the European economy.
