EU taxonomy is on everyone’s lips. Some refer to it as if it was a mysterious framework, so complex that only few have the gift of understanding it. I would argue that those who claim so have made little effort to digest it properly.
EU Taxonomy was adopted on 18 June 2020 as EU Regulation 2020/852 and defines environmentally sustainable business activity.
It is applicable to: (i) the financial market participants and issuers of financial products or corporate bonds, (ii) financial market participants that make available financial products and (iii) the undertakings which are under obligation to publish a non-financial statement pursuant to the Directive on Accounting. In brief: the EU Taxonomy guides the financial market participants as to whether a given activity can be classified as supporting environmentally-sustainable initiatives.
The EU Taxonomy defines what economic activity qualifies as environmentally sustainable (Article 3). Such activity has to meet three criteria:
1) it has to contribute substantially to at least one of the environmental objectives referred to in Article 9 of the Regulation;
2) it does not significantly harm any of the environmental objectives set out in Article 9; and
3) it complies with the technical screening criteria of the Regulation.
Consequently, to understand whether an activity can be defined as environmentally sustainable, you need to refer to Article 9. There you can check whether a financial product meets at least one of the six environmental objectives. These objectives are as follows:
1) climate change mitigation;
2) climate change adaptation;
3) sustainable use and protection of water and marine resources;
4) transition to circular economy;
5) pollution prevention and control;
6) protection and restoration of biodiversity and ecosystems.
A more detailed description of these activities has been provided in Articles 10-15 of the EU Taxonomy. What is more, the Commission was obliged to adopt special delegated acts dedicated to each of the above-listed specific objectives. In order to give an idea of how these objectives have been framed, I will dedicate a separate post to each of these objectives.
Consequently, the EU Taxonomy helps the ones who offer financial products to consistently identify products which are environmentally sustainable. With the taxonomy, customers can be sure that the product that they are investing in meets certain environmentally sustainable criteria.
EU Taxonomy can be visualized as the trunk of a solid tree with six main branches, each representing a particular environmental objective. These objectives are surrounded by the delegated acts. Thus, EU Taxonomy is like a big oak tree navigating financial market participants through environmentally sustainable initiatives.