What is the EU taxonomy for sustainable activities and what does it mean for businesses?

The European Union (EU) has set out a climate plan to cut greenhouse gas emissions by at least 55% by 2030 to be on the path to being carbon neutral by 2050. The European Green Deal sets out additional actions and objectives relating to finance, transport, industry and more. To achieve this, the EU needs to increase sustainable investments and avoid greenwashing. It therefore created a standard classification system for sustainable economic activities – an EU taxonomy.

Coming into force in July 2020, the EU taxonomy classification system created a list of environmentally sustainable economic activities. It aims to provide clarity for businesses and policymakers what economic activity is sustainable, and encourage investment in those activities.

The European Commission states that the taxonomy provides “companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable. In this way, it should create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments where they are most needed.”

Its six environmental objectives are:

1.      Climate change mitigation

2.      Climate change adaptation

3.      The sustainable use and protection of water and marine resources

4.      The transition to a circular economy

5.      Pollution prevention and control

6.      The protection and restoration of biodiversity and ecosystems

For an economic or investment activity to be classified as sustainable, it must not only contribute towards meeting one of the six objectives but must not have a detrimental impact on any of them. This proposition is the Do No Significant Harm (DNSH) principle.

The full set of conditions are:

·        Making a substantial contribution to at least one environmental objective

·        Doing no significant harm to any other environmental objective

·        Complying with minimum social safeguards

·        Complying with the technical screening criteria

This taxonomy is an opportunity for businesses and financial institutions to prove their sustainability credentials. For large companies that fall under the scope of the Non-Financial Reporting Directive (or Directive 2014/95/EU to give it its official name), it is mandatory to disclose the extent to which their business activities meet the EU taxonomy criteria. Financial market participants must also  disclose the extent to which their financial products meet the EU taxonomy criteria. For those not covered by mandatory obligations, the EU encourages voluntary use of the taxonomy to develop ESG strategies.

The EU taxonomy is one of the global regulations that inform the automated scoring of Coriolis Technologies’ ESG tracker, alongside others, including the United Nations Sustainable Development Goals. The sustainability tracker scores company activity against taxonomy conditions and the DNSH principle, automating the scoring process. When a company is checked against the EU taxonomy it falls into one of four categories:

·        Activity found to cause Significant Harm against corresponding EU Taxonomy Regulation

·        Activity found to cause Significant Harm against corresponding EU Taxonomy Regulation, with preventative action possible.

·        No Significant Harm found against any corresponding EU Taxonomy Regulation

·        Activity found that positively contributes to corresponding EU Taxonomy Regulation

Find out more about Coriolis Technologies’ ESG Ratings.