What is the EU taxonomy?
EU taxonomy for sustainable activities—what is it and why do we need it to reach the UN Sustainable Development Goals 2030? One of the key barriers to the circular economy, identified across industries over and over again, has been the difficulty of clearly defining what ‘circularity’ is. In truth, the circular economy is highly-measurable due to its focus on material flows. The taxonomy is a science-based classification system aimed at providing the sought-after definitions for sustainable activities.
The event stream is available here.
On the 31st of August, the Nordic Circular Hotspot arranged a digital seminar on the EU taxonomy, its definition and the likely impacts it will have on the Nordic region (and beyond). First, it couldn’t be more important to clear a common misconception about the taxonomy: it is not in any way related to tax. Instead, the EU taxonomy is named after its inspiration and namesake within the field of biology.
This is what the European Commission says the definition of the EU taxonomy is:
“The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. … The EU taxonomy would provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable. In this way, it should create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments where they are most needed.”
In other words, the taxonomy provides much-needed and sought-after definitions for what ‘sustainability’ means. The purpose of this is not only to be able to consistently define sustainability across the EU and EEA but also to be able to crack down on greenwashing and unsubstantiated sustainability claims. In essence, the taxonomy provides a common language and clear definitions for what it means to be ‘sustainable’.
What are the goals and criteria of the taxonomy?
The goals of the taxonomy can be summarised in three key points:
Reorientation of capital flows with a focus on sustainable investments
Establishing sustainability as a component of risk management
Promoting and encouraging long-term investments and economic activity
Source: https://eu-taxonomy.info/
Equally, the taxonomy also has clearly laid out criteria for how activity can be defined as sustainable. For this to be the case, it needs to meet the following requirements, which are tightly linked to six environmental objectives (see illustration).
The economic activity contributes to one of six environmental objectives
The economic activity does ‘no significant harm’ (DNSH) to any of the six environmental objectives
The economic activity meets ‘minimum safeguards’ such as the UN Guiding Principles on Business and Human Rights to not have a negative social impact
The economic activity complies with the technical screening criteria developed by the EU Technical Expert Group
What are the current impacts of the EU taxonomy?
Sustainability reporting is nothing new. In fact, 96% of the world’s 250 biggest companies provide this information. At the top of the league for this is North America, with the EU now seriously stepping up the game. In this way, the EU taxonomy does not stand out, instead, it fits the global patterns. However, as Jacco Verstraeten-Jochemsen (Circle Economy) noted, we can see a ‘Brussels effect’ following the announcement and implementation of the taxonomy—now countries such as the US, UK, India and Taiwan are introducing comparable legislative measures.
There are as many as 35 different taxonomy schemes globally. And while, according to Paal Frisvold (SINTEF), this creates a bit of healthy competition to set the regulatory framework, it is also what motivated the EU Commission to launch this initiative. That motivation being the chaos of having so many public and private initiatives that it became necessary to clear them out and set up a new unified system. What makes the EU taxonomy stand out is, therefore, not the idea itself but the EU’s unique position of having a regulatory approach backed by considerable market power. As Frisvold notes, “The EU taxonomy is going to be the matrix of the 21st century.” Now sustainability reporting is finally moving from a voluntary base to being obligatory.
On the ground, lawyers Andreas Wahl and Cathrine Hambro (BULL) are still noticing that there is a low focus and low knowledge regarding the taxonomy. This is the case despite the way in which it enables and affects other measures such as funding requirements, investment decisions, advertising and procurement. However, as Isabella Holmgaard (MESSAGE) points out, from a business perspective, there is still a gap in what is required and the tools that are available to comply with those requirements. For example, there is an urgent need for more harmonised databases and data collection systems to actually handle the required data and information.
But the bottom line is, as Verstraeten-Jochemsen notes, that the impact of the EU taxonomy and the following legislations is hard to overestimate. Therefore, if you have not already familiarised yourself with the taxonomy, now is the time to start.
Thank you to the panel and participants:
Jacco Verstraeten-Jochemsen, Paal Frisvold, Helga Óttarsdóttir, Andreas Wahl, Cathrine Hambro, Isabella Holmgaard, Cathrine Barth, Einar Kleppe Holthe and Villeman Vinje.
