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The EU Taxonomy is a classification tool for business activities, addressing activities in industries that together are responsible for more than 90% of the total climate gas emissions. It includes technical criteria that must be complied with in order for an activity to be considered sustainable. The first draft of the taxonomy was published in 2019, with the last revision published in April 2021. It is scheduled to take effect from January 1st 2022.
The primary objective of the taxonomy is to redirect capital flows towards more sustainable business activities. The EU initiated it after seeing a general lack of sustainability considerations in investment decisions and the need for a common standard for assessing the sustainability of investments.
The European Union. Through the Technical Expert Group - a committee with representatives from companies, sector associations, NGOs, trade unions, universities and research institutes - it has developed technical criteria for when certain activities may be considered sustainable.
The taxonomy is relevant for all large companies and small and medium sized enterprises (SMEs) in the EU, as well as a significant share of non-EU companies that trade with EU companies or that have EU funds as shareholders.
Through the Sustainable Finance Disclosure Regulation, public interest entities, meaning listed companies, banks and insurance companies with more than 500 employees (11,000 in the EU) will be required to report according to the taxonomy.
The proposed Corporate Sustainability Reporting Directive, as of spring 2021 not yet implemented, extends coverage to all large companies and all listed SMEs, and on a voluntary basis to all other SMEs - totalling more than 40,000 additional companies.
Companies who are required to report in accordance with the taxonomy will have to conduct an assessment of their business activities, and determine to what extent they are aligned with the technical criteria. The share of turnover, CAPEX and OPEX that are associated with taxonomy-aligned business activities are considered a company’s taxonomy scores, and is what owning entities (i.e. a private equity fund) will have to use into calculation of their own, aggregated taxonomy scores.
A goal of the taxonomy is to provide a clear framework for assessing the level of sustainability of one’s business activities. This way, the Taxonomy gives you an unambiguous score to improve from.
A high taxonomy score may lower your cost of capital. The taxonomy score of banks and institutional investors’ portfolios will affect their cost of borrowing, and most banks already provide lower interest rates to companies that operate more sustainably.
With a high taxonomy score, you may be able to:
First of all, you might be required to do so. If you are not a large company and not a qualifying SME, reporting may be voluntary. There might still be benefits to assessing and reporting your performance, such as:
The primary driver of your taxonomy score is to what extent you are substantially contributing to one or more or the EU climate objectives. Even if you do not pass the listed criteria for making a substantial contribution, you should verify that you are compliant with the “Do No Significant Harm”-criteria. By doing so, you establish that your business activities are not doing any significant harm to the EU climate objectives.