The EU launched an action plan of Financing Sustainable Growth to meet its European Green Deal objectives. This classification system provides definitions for which economic activities can be considered sustainable. It simply answers the question: ‘What is green?’ The goal is to direct investors towards sustainable economic activities, which is necessary to meet the climate targets for 2030 and 2050.  This article will explain how this system works and how it will affect businesses. 

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The EU taxonomy

The EU taxonomy is a classification system that determines which activities are environmentally sustainable and which are not. An economic activity is sustainable if it:

a) contributes to at least one of the six environmental objectives and 

b) does not harm any of the other five environmental objectives, while complying with minimum social safeguards and technical screening criteria (TSC). These technical screening criteria are developed in delegated acts. 

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The six environmental objectives

The six environmental objectives include:

1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy, waste prevention and recycling
5. Pollution prevention and control
6. Healthy ecosystem

The Taxonomy delegated acts will state clear, consistent and objective criteria for activities to define what it means to make a substantial contribution to the objectives. 

What is the impact on companies that can be expected in 2022? Businesses should start assessing which activities are considered environmentally sustainable and which are not aligned with the Taxonomy. This offers possibilities for companies to adjust activities to gain taxonomy alignment and to plan their environmental transition. Also, alongside the Sustainability Reporting Directive, the EU taxonomy will ensure that reporting companies under the scope of CSRD will disclose their environmental performance.

In conclusion, the EU Taxonomy provides a definition of ‘what is green’ to help companies, investors and policymakers align on a common goal of decarbonising the future. The tool aims to create a common definition on green activities and is expected to encourage a transition towards investing in sustainable, green projects.