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15 November 2021 Glossary

What is the EU taxonomy

The EU Taxonomy is at the forefront of the European Union's efforts to address climate change and promote a future. It serves as a classification system that aims to identify activities that are environmentally sustainable while also guiding investors and companies towards making responsible and eco conscious decisions.

By Klappir

EU Taxonomy

In essence;

  • The EU Taxonomy is a classification system developed by the European Union (EU) for activities.
  • Its main objective is to encourage finance and combat climate change.
  • Activities are categorized as either "or "Not yet sustainable" (transition activities).
  • The taxonomy focuses on six objectives, including climate change mitigation, adaptation, water resources, circular economy, pollution prevention and biodiversity restoration.
  • Each industry has criteria tailored to their sector, which are regularly updated by the Technical Expert Group (TEG).
  • Transparency is an aspect where companies and financial institutions need to disclose their alignment with the criteria defined in the taxonomy.
  • The implementation follows a phased approach that initially targets sectors with impact but gradually expands over time.
  • The regulatory framework, for finance initiatives is provided by the EU Taxonomy Regulation.
  • The EU Taxonomy has both advantages and disadvantages. It enjoys support, for its role in promoting finance but it has also faced criticism for potentially being too strict.

In summary the EU Taxonomy is a tool developed by the European Union with the aim of creating an more sustainable future.

The EU Taxonomy can be defined as an standardized framework that provides a language for categorizing economic activities based on their environmental impact. These activities are divided into two categories; "activities, which are considered environmentally friendly and "Not yet sustainable" or transition activities that have the potential for sustainability but need further improvements.

To determine the sustainability of an activity the EU Taxonomy focuses on six important environmental objectives. These objectives cover aspects of development including Climate Change Mitigation, Climate Change Adaptation, Sustainable Use and Protection of Water and Marine Resources Transition to a Circular Economy, Pollution Prevention and Control as well, as Biodiversity and Ecosystem Restoration.

Recognizing that different industries have characteristics and environmental impacts the EU Taxonomy takes into account sector criteria to ensure accuracy in its assessments. An expert group called the Technical Expert Group (TEG) reviews and updates the criteria of the EU Taxonomy to ensure its relevance and accuracy. This approach allows the EU Taxonomy to effectively evaluate and classify activities based on how they align with sector specific sustainability goals.

Promoting Transparency and Accountability; Transparency plays a role, in driving finance. The EU Taxonomy mandates that companies and financial institutions disclose the proportion of their activities that meet the criteria of the taxonomy. This disclosure empowers investors to make decisions directing their resources towards activities that prioritize environmental sustainability.

A Phased Approach; Recognizing the complexity and scale of this challenge the implementation of the EU Taxonomy follows a phased approach. Initially it focuses on sectors with impact such as climate change mitigation and adaptation. Over time it expands its scope to include objectives thus extending its impact across various economic activities.

Regulatory Framework; The adoption of the EU Taxonomy Regulation in June 2020 provides a foundation for implementing the taxonomy across all member states, within the European Union. The EU Taxonomy lays down the guidelines, for determining activities and forms the foundation for sustainable finance initiatives.

Disadvantages; While the EU Taxonomy has gained support for its role in promoting finance and environmental responsibility it does face some criticism. Some people argue that the criteria may be too strict for industries or require adjustments to address the complexities of specific economic activities. There is no denying the impact of the EU Taxonomy in fostering sustainable practices.

The EU Taxonomy emerges as a tool in our efforts to build a sustainable and resilient global economy. By offering an comprehensive framework to evaluate sustainability it empowers individuals, businesses and investors to make choices that align with the green objectives of the EU. As we continue on our journey towards sustainability the EU Taxonomy acts as a guiding light paving the way, for a greener and more prosperous future for generations to come.

By Klappir15 November 2021

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