EU Taxonomy Regulation
New tool to navigate the transition to a low-carbon, resilient and resource-efficient economy
Ambitious green objectives
As other international organizations, such as the United Nations and the OECD, the European Union has developed its own ESG framework.
The main objective is to navigate the transition to a low-carbon, resilient and resource-efficient economy, in accordance with the Agreements of the Paris, SDGs and EU Green Deal. In concrete terms, the taxonomy aims
- Identifying green activities
- Harmonizing green labels
- Preventing green washing
The European Union defines 6 environmental objectives:
- Climate change mitigation
- Climate change adaptation
- Sustainable and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
Consistent with the EU Action Plan on Financing Sustainable Growth, finance is a critical enabler of transformative improvements in existing industries in Europe and globally.
3 Groups of users
SDR = Sustainability-Related Disclosures in the Financial Services Sector
NFRD = Non-Financial Reporting Directive
The European Union defines a sustainable activity as an activity which contributes substantially to one environmental objective and avoids significantly undermining other environmental objectives - The EU introduced the original concept of DNSH - Do Not Significant Harm.
EU Taxonomy identifies 67 activities in 7 different sectors (Code NACE):
- Agriculture and Forestry
- Electricity, Gas, Steam and Air conditioning supply
- Information and Communication Technologies (ICT)
- Water, Waster and Sewerage remediation
The EU Taxonomy sets performance thresholds, or technical screening criteria for economic activities which:
- substantially contribute (SC) to at least one of the 6 environmental objectives
- do not significant harm (DNSH) to any other five environmental objectives
- comply with minimum safeguards (ILO core labour conventions)
To be taxonomy-eligible, an economic activity must go through 4 steps
Assessing a company's Taxonomy alignement according to the process above:
- The company's activities need to be broken down by turnover (or revenue, when appropriate) or capex and if relevent, opex.
- For each activity, the company validates if the activity is taxonomy-eligible by going through the 4 steps process (SC - DNSH - minimum social safegards - technical screening critera)
- For each Taxonomy-eligible activity, the company can apply the corresponding turnover as Taxonomy-aligned
Assessing a portfolio's Taxonomy alignement according to the process above:
Once relevant activities are identified in a company's portfolio and the Taxonomy alignement calculated, the overall portfolio's Taxonomy alignement can be calculated by a weighted sum of each company's Taxonomy alignement.