EU Taxonomy

As 2024 represents the 2nd year of the EU Taxonomy reporting,
today’s article aims to present an overview of the taxonomy within EU and takeaways
from the past two years.

The European Union (EU) is taking significant strides in promoting
sustainable finance, with the EU Taxonomy serving as a cornerstone of
its efforts. This classification system is designed to guide investments
towards economic activities essential for achieving the EU’s climate and
environmental goals. By defining criteria for what constitutes “sustainable,”
the taxonomy aligns investments with the European Green Deal objectives and the
ambitious target of net-zero emissions by 2050.

What is the EU Taxonomy?

The EU Taxonomy is a tool that provides a common language for
identifying environmentally sustainable activities. It addresses the need for
clarity and consistency in defining “sustainability,” ensuring that
investments genuinely contribute to climate and environmental objectives. This
framework is part of the EU’s broader action plan on financing sustainable
growth and is critical to meeting its 2030 climate and energy targets.

The taxonomy helps financial and non-financial companies
classify activities based on their environmental impact. This fosters
transparency, mitigates risks of greenwashing, and protects investors by
offering a shared understanding of sustainable practices.

Key Benefits of the EU Taxonomy

Adopting the EU Taxonomy offers a range of advantages for companies
beyond regulatory compliance:

• Improved
  Transparency and Accountability: Clear
  reporting standards enhance stakeholder trust.
• Access
  to Green Financing: Companies can tap into
  green bonds and sustainable investment funds, often on favourable terms.
• Enhanced
  Reputation: Demonstrating sustainability
  attracts environmentally conscious consumers, partners, and investors.
• Operational
  Efficiency and Innovation: Sustainable
  practices reduce resource consumption and drive long-term value creation.
• Employee
  Retention: Many employees prefer organizations
  committed to sustainability.

Implementation and Reporting Phases

The EU has adopted a phased approach to implement the taxonomy,
providing companies with time to adapt:

1. Non-Financial
   Companies:
   
   • In 2021,
     they began reporting the proportion of turnover, capital expenditure
     (CapEx), and operational expenditure (OpEx) related to activities
     eligible under the Climate Delegated Act.
   • By 2022,
     this expanded to include alignment, requiring companies to disclose
     taxonomy-eligible and aligned activities. Reports now distinguish between
     eligible but unaligned activities and non-taxonomy-eligible activities.
2. Financial
   Companies:
   
   • Financial
     institutions were granted a two-year phase-in period, with mandatory
     alignment reporting beginning in 2023.
   • Credit
     institutions must disclose the share of their trading portfolios and
     interbank loans in total assets, while insurers report taxonomy-eligible
     and ineligible activities in nonlife insurance and reinsurance.

Key Findings from Recent Analysis

A study of 277 non-financial entities reveals significant insights:

• 96% of
  companies published taxonomy disclosures, with
  89% reporting at least one KPI (turnover, CapEx, OpEx).
• Average
  shares of eligible CapEx, OpEx, and turnover stood at 36%, 28%, and
  25%, respectively, closely mirroring the previous year’s data.
• Over a
  third of companies reported no eligible turnover, highlighting the limited
  contribution of some industries to climate change mitigation (CCM) and
  adaptation (CCA).
• Alignment
  figures were notably lower, particularly in CapEx, where challenges arise
  from the taxonomy’s eligibility criteria.

Recommendations for an Enhanced Taxonomy

To fully realize the EU Taxonomy’s potential, experts recommend
addressing several gaps:

1. Broader
   Industry Inclusion: Current criteria exclude
   sectors like chemicals, which are pivotal for a comprehensive climate
   strategy.
2. Long-Term
   Climate Goals: The taxonomy’s targets are
   limited to 2025 and 2035. Setting pathways to 2050 would better align with
   the Paris Agreement’s objectives.
3. Support
   for Transition Finance: Including mechanisms
   to fund transitions from high- to low-carbon technologies is essential for
   accelerating sustainable practices.

Nevertheless, the EU Taxonomy represents a critical step in aligning
investments with climate goals, but adjustments are necessary to meet the
challenges of the Paris Agreement. Broader industry coverage, clear long-term
goals, and enhanced support for transition finance are vital to its success. By
refining this framework, the EU can set a global precedent, driving progress
toward a sustainable and low-carbon economy.

References

European Commission. (2020, July). EU
taxonomy for sustainable activities. Retrieved from European Commission: https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en

Harrison, K. (2024, November 15). EU
Finance Framework Needs Overhaul to Meet Paris Climate Goals. Retrieved
from E+ELeader:
https://environmentenergyleader.com/stories/eu-finance-framework-needs-overhaul-to-meet-paris-climate-goals,57198

Niewold, J. (2024, November 12). Why
organizations should stay the course with their EU taxonomy reporting.
Retrieved from EY:
https://www.ey.com/en_cn/insights/assurance/eu-taxonomy-report

 Photo: https://th.bing.com/th/id/OIP.zKVmRvE7-SjDgSXJtDOTCgHaFQ?rs=1&pid=ImgDetMain