Understanding the EU taxonomy

The Green Deal presented by the European Union in 2019 brings together a set of policy initiatives that seek several environmental objectives, including a climate neutral Europe by 2050 and a net reduction of at least 55 % of greenhouse gas emissions by 2030. Along this path, the Sustainable Finance Action Plan was presented, which includes measures within the following three categories: 

• Redirect capital flows towards sustainable activities
• Sustainability as part of risk assessment.
• Inclusion of sustainability in corporate reports

Specifically, addressing the challenges of greenwashing has been one of the premises and therefore, it has been key to present a common definition of what a sustainable investment means and how ESG considerations have been integrated into the decision-making process.

Precisely as part of a broader strategy to redirect capital flows towards sustainable activities, the EU has published the “green taxonomy”. This provides technically and scientifically based criteria to classify an economic activity as sustainable. This scenario offers a level of certainty to investors, avoiding the possibilities of greenwashing and helping investors in their benchmarking process against other possible initiatives. This contributes decisively to redirecting investments to where they are most needed. By directing investments towards sustainable projects and activities across the EU, the taxonomy should help meet the EU's climate and energy goals for 2030 and 2050.

For companies that demonstrate compliance with all criteria, the profits, capital expenditures and operating expenses (OPEX) associated with that activity will be considered “taxonomy-aligned.”

 The sectors addressed by the EU taxonomy are climate, energy, agriculture, industry, environment and oceans, transport, sustainable finance, regional development and research and innovation. From an institutional perspective, the Sustainable Finance Platform has been created as a group of sustainability and industry experts representing a broad spectrum of stakeholders, including key actors from the financial sector, industry, civil society and the academic world. This Platform plays an essential role in advising and developing technical selection criteria, providing technical and scientific information to the Commission.

Starting January 1, 2023, publicly traded companies and so-called “large companies” with more than 500 employees will be required to report on their alignment with the taxonomy, along with relevant information that can help investors evaluate their performance. IS G. Small and medium-sized businesses can report voluntarily, but will be affected by the upcoming EU Directive on corporate sustainability reporting. Investment funds will also have to report on the alignment of their activities with the taxonomy or evaluate the portfolio companies themselves. Meanwhile, financial institutions must also evaluate the sustainability performance of their clients and accordingly disclose this information to the public.

One of the key features of the taxonomy is that it provides a score that indicates, among other things, where there is room for improvement. A company with a high taxonomy score could, for example, renegotiate interest rates with banks and institutional investors by borrowing. 

Other related initiatives, such as the EU Ecolabel for financial products and the EU Green Bond Standard, will ensure that activities aligned with the taxonomy are visible and recognized in investment decisions.