EU Taxonomy
Summary
The EU Taxonomy is a classification system established by the European Union to facilitate sustainable investment by identifying which economic activities can be considered environmentally sustainable. It’s part of the Eu’s action plan on financing sustainable growth and aims to direct investments towards sustainable projects and activities. This initiative seeks to provide clarity and transparency on sustainability to investors, companies, issuers, and project promoters, helping to mitigate the risk of green-washing, where claims of environmental friendliness are misleading or unfounded.
What is EU Taxonomy composition?
1. Climate Change Mitigation
Aims to reduce greenhouse gas emissions and enhance removals, targeting activities that support the transition to a low carbon economy. This includes renewable energy production, energy efficiency improvements, low-emission and electric transport, and carbon capture technologies, aligning with global efforts to limit global warming.
2. Climate Change Adaptation
Focuses on adjusting systems to withstand the impacts of climate change, including the development of resilient infrastructure, agricultural adaptation, and coastal protection. The objective is to minimize the adverse effects of climate change on human and natural systems, enhancing their resilience.
3. Sustainable Use and Protection of Water and Marine Resources
Targets the conservation of water quality and availability and the protection of marine ecosystems. It encompasses sustainable water management, wastewater treatment, pollution reduction, and the preservation of aquatic biodiversity, aiming to ensure the sustainable use of water and marine resources.
4. Transition to a Circular Economy
Promotes the reduction of resource consumption and waste generation through recycling, reusing, and extending the lifecycle of products and materials. This objective aims to create a more sustainable, efficient economy that minimizes environmental impacts and conserves natural resources.
5. Pollution Prevention and Control
Seeks to minimize the emission of pollutants into the air, water, and soil, focusing on pollution control technologies, the reduction of hazardous substances, and cleaner production processes. The aim is to protect environmental and human health by preventing and managing pollution effectively.
6. Protection and Restoration of Biodiversity and Ecosystems
Aims to conserve and restore biodiversity and ecosystem services, including the protection of endangered species, habitat restoration, sustainable forestry, and agriculture. This objective is crucial for ensuring the resilience and sustainability of ecosystems, supporting climate regulation, food security, and human well-being.
*While environmentally focused, the Taxonomy also stipulates minimum safeguards for human rights and working conditions
Does the EU Taxonomy impact the Companies Operating conditions？
Two things:
First, a systems view is needed, to identify an environmentally sustainable activity. Substantive contributions must not come at the expense of significant negative impact elsewhere, both upstream and downstream value chains.
Secondly, Companies need to see how their green actions fit with all their money-making activities to really understand their total impact, taxonomy aligned company activities must be put in context of all revenue-generating activities, to understand how coupled business activities and impacts are. To identify the degree to which a company is Taxonomy-aligned, one must revenue weight each distinct activity. A company is not 100% Taxonomy aligned, until all revenue-generating activities make substantive contributions to one or more of the stated objectives. By doing so, anything less than full sustainability integration into an organisation’s product and service portfolio will be discouraged.
As such, the Taxonomy should not be interpreted as yet another reporting burden placed on companies. Instead this is a strategic imperative, an opportunity for companies to understand whether or not their activites can be classified as sustainable, and have a definitive and tangible end goal to achieve in regards to their sustainability performance.
Why do we need an EU taxonomy?
The EU taxonomy is part of the EU’s overall efforts to reach the objectives of the European Green Deal. It acts as a robust, science-based transparency tool to help companies and investors make sustainable investment decisions.
create security for investors
protect private investors from green-washing
help companies to plan the transition
mitigate market fragmentation, and
scale up sustainable investments to help achieve the Green Deal objectives.
What is the Performance of EU Taxonomy?
EU Taxonomy eligibility and alignment
2023 was an important one for sustainable finance and the EU Taxonomy for sustainable activities.For the first time, non-financial companies reported on alignment with the Taxonomy’s first two environmental objectives: climate mitigation and adaptation. In addition, financial companies disclosed how much of their assets were eligible for Taxonomy alignment.
The average Taxonomy-aligned turnover was just above 10%.
On average, less than half of the turnover from activities eligible under the EU Taxonomy was aligned, showing the potential to further enhance alignment over time.
The average Taxonomy-aligned capital expenditure (capex) of around 14% was higher than the average aligned turnover, which is promising because it shows that companies are actually investing in green initiatives.
For financial companies that reported on eligible assets, the average eligible turnover and average eligible capex were both just above 20%.
Data quality and comparability were a key issue in 2023, the first year that non-financial companies reported on Taxonomy alignment. In particular, some companies appeared not to adhere to the regulatory templates and were not able to classify activities as per the Taxonomy regulation.
Opex refers to operational expenditure. The analysis covers data reported by companies under the EU Taxonomy in 2023 for FY 2022. Data as of January 2024. Source: MSCI ESG Research