What is taxonomy in the EU?
Recently, the term EU taxonomy has been frequently used in the context of European climate protection legislation. In this article you will find out what we can understand by this term and what it brings us.
1) Where did the term EU taxonomy come from and what does it mean?
The EU Taxonomy is legislatively anchored in the EU Regulation 2020/852 of the European Parliament and of the Council of 18 June 2020 establishing a framework to facilitate sustainable investments (the "Regulation").
It is a single classification system that contains the principles and objectives for the classification of sustainable economic activities. The aim of the Regulation is thus to define binding EU-wide rules that determine which economic activities will and will not be considered environmentally sustainable in the future. The Regulation is intended to encourage economic operators to invest in environmentally and climate friendly economic sectors and further defines the ways in which sustainable investments and greener behaviour can be implemented. At the same time, it should help all market actors to make sustainable investment decisions.
The Regulation therefore contains general criteria for sustainable activities. The specific requirements are then provided by the European Commission through the so-called technical screening criteria, which the European Commission adopts through delegated acts complementing the Regulation itself. The main purpose of these specific measures is to help prevent greenwashing, as compliance with them can be well monitored through the technical screening criteria. This should not lead to circumvention of requirements or distortion of input data.
2) Which entities are covered by the Regulation?
The Regulation applies to the following entities or activities:
- Measures adopted by Member States or the Union that impose requirements on financial market participants or issuers in relation to financial products or corporate bonds that are marketed as environmentally sustainable (i.e. investments in one or more economic activities that qualify as environmentally sustainable under this Regulation, as further elaborated below).
- financial market participants providing financial products;
- entities subject to non-financial reporting obligations.
3) How can we get companies to do business in a more sustainable way in the future?
Companies' business activities will comply with the taxonomy if they meet the following conditions:
- the company makes a significant contribution to at least one of the six environmental objectives,
- does not significantly harm any of the other objectives,
- it complies with basic social standards (protection of human rights, prohibition of child labour, fair remuneration, etc.),
- meets the 'technical implementation criteria' set by the European Commission.
As regards the first condition, the environmental objectives are defined in Article 9 of the Regulation and are as follows:
a) Climate change mitigation;
b) Adaptation to climate change;
c) Sustainable use and protection of water and marine resources;
d) Transition to a circular economy;
e) Prevention and reduction of pollution;
f) Protection and restoration of biodiversity and ecosystems.
a) Climate change mitigation
Climate change mitigation can be done both proactively, i.e. by taking actions that combat climate change and mitigate it, and passively, where actors refrain from certain activities that harm the climate. For the first objective, the active part will include activities that contribute significantly to stabilising greenhouse gas concentrations in the atmosphere and avoiding their excess production, e.g. process or product innovation. This may include, for example, the production of energy from renewable sources or the transition to the use of materials from renewable sources.
b) Adaptation to climate change
The aim of this criterion is to support activities that reduce the risk of adverse climate impacts and economic activities that are significantly damaging to the climate. More detailed criteria will then be defined by the European Commission in the technical criteria mentioned above. These criteria include categories such as forestry, manufacturing, electricity generation or production of other materials, infrastructure or transport. In each of these categories, the activities to be carried out are set out and detailed.
c) Sustainable use and protection of water and marine resources
Here, the Regulation envisages activities that will contribute significantly to achieving good status of water bodies, including surface and groundwater bodies, or to preventing their deterioration. This will be achieved, for example, through the protection of the environment from the adverse effects of urban and industrial waste water discharges or through better and more efficient water management.
d) Transition to a circular economy
The aim of this category is to encourage companies to invest in materials from sustainable sources and other raw materials, to increase the durability, repairability or reusability of products or their recyclability. At the same time, the content of hazardous substances in products should be significantly reduced or replaced by safer alternatives.
e) Pollution prevention and control
In this category, companies can contribute mainly by improving air, water or soil quality, removing chemicals in production or cleaning up litter.
f) Protection and restoration of biodiversity and ecosystems
Biodiversity can be protected or restored through, for example, sustainable use and management of landscapes, including adequate protection of soil biodiversity, sustainable agricultural practices, including those that contribute to halting or preventing the degradation of soils and other ecosystems, and sustainable forest management.
Conclusion
It is clear that there are indeed a large number of activities that can support environmental protection, and hence climate goals. Private companies have an important role to play in the fight against climate change and the Regulation should serve as one of the means to encourage companies to become more involved through a predictable and uniformly classified environment. The EU is thus trying to mobilise private capital precisely towards sustainable and low-carbon activities. Finally, the EU is committed to achieving climate neutrality by 2050, making it the first climate-neutral continent. In the short term, it has set a commitment to reduce greenhouse gas emissions by 55% (compared to 1990) and a proposal for a 90% reduction is currently under discussion when considering the short term target for 2040.