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

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