EU Taxonomy –The road to a more sustainable future

Regulation (EU) 2020/852 (EU Taxonomy) is a key tool on the European Union’s path towards a climate-neutral economy. It was designed to provide a common system for identifying and classifying environmentally sustainable economic activities and help investors set a framework for progressively green investments leading up to 2050. It is an integral part of the European Green Deal as well as the EU Action Plan on Sustainable Finance.

Few words about regulation:

The EU Taxonomy Regulation, in effect since July 12^th, 2020, outlines six environmental objectives:

• Climate change mitigation
• Climate change adaptation
• Sustainable use and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems.

According to the EU Taxonomy Regulation, an economic activity is categorized as “environmentally sustainable” when it:

• contributes significantly to the achievement of one or more of the aforementioned environmental objectives
• does not do significant harm to other environmental objective
• is exercised in accordance with the minimum safeguards (e.g. OECD guidelines, UN Guiding Principles, principles and rights from fundamental conventions identified in the International Labour Organization’s declaration)
• complies with the technical control criteria established by the Commission.

The regulation requires obligation in:

• Large public interest companies with more than 500 employees, which are already required to disclose non-financial information under the scope of the Non-Financial Reporting Directive (NFRD)
• Financial market participants offering financial products in the EU

Eligibility & Alignment with the Regulation

The 1^st Delegated Act, often referred to as the “Climate Delegated Act”, outlining technical criteria for economic activities with a significant contribution to the first two objectives (climate change mitigation and climate change adaptation) was adopted on July 4^th, 2021, and has been effective since January 1^st, 2022. The technical criteria for the remaining objectives are anticipated to be issued in the first half of 2022.

As per Regulation (EU) 2020/852 (EU Taxonomy), “eligible” designates economic activities within the Climate Delegated Act. However, an “environmentally sustainable activity” is characterized by alignment with the EU Taxonomy Regulation. Alignment requires adherence to all specified technical criteria, avoidance of significant harm to other environmental objectives and conformance with minimum safeguards.

Meeting eligibility requirements initially and subsequently aligning with the EU taxonomy is a new obligation for corporations setting different requirements per sector. As previously mentioned, the full content of the regulation has not yet been issued and the technical criteria for Objectives 3 to 6 are yet to be announced.

As previously stated, the subsequent phase involves conducting a comprehensive evaluation of loans and investments on an individual basis to demonstrate their alignment with the EU Taxonomy. This entails proving their environmental sustainability based on distinct technical criteria. Therefore, an upsurge in the demand for loans and investments with green attributes is anticipated. A shift in company behavior driven by a desire for competitiveness and adherence to market trends is similarly expected.  Moreover, the promotion of environmentally sustainable products and services that meet the new green criteria for loans and investments is foreseen to bring benefits to both consumers and society in the near future.

Possessing extensive experience in Environmental and Social Management along with Corporate Governance across various economic sectors, PRIORITY’s team closely monitors pertinent announcements related to the EU Taxonomy. At the same time, PRIORITY has proactively identified and analyzed the EU Taxonomy Regulation’s requirements concerning data analysis and quantitative and qualitative disclosures. The team is well-equipped to provide guidance for ensuring compliance with the regulation.