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What is the EU Taxonomy again?
The EU Taxonomy is a classification system that determines the sustainable nature of business activities.
The first thing that a company must do is determining its NACE code (or whether its activities fall under any of the categories). Activities that fall under the scope of the EU Taxonomy, are considered ‘eligible’. If your company wishes to claim that their eligible activity pursues sustainability objectives, you must prove so by fulfilling a three-step assessment:
- Demonstrate your substantial contribution to one of the six environmental objectives.
- Prove you Do Not Significantly Harm (‘DNSH’) to the five remaining objectives.
- Satisfy the Minimum Social Safeguards.
If you need a refresher, check out our EU Taxonomy article.
The six environmental objectives
The EU Taxonomy framework identifies six core environmental objectives:
- Climate change mitigation
- Climate change adaptation
- Water
- Pollution
- Biodiversity
- Circularity
Climate change mitigation and adaptation
The definitions of the first two environmental objectives (climate change adaptation and mitigation) were published back in 2021.
Climate change mitigation refers to activities which directly contribute to mitigating the negative environmental impacts of their performance on climate change. This category is focused on the reduction of greenhouse gas emissions and to remove or store them safely. In addition, it includes transitional activities, which contribute to the overall promotion of sustainability and climate change mitigation for sectors where there is no low-carbon economically feasible alternative yet.
The Complementary Climate Delegated Act introduced nuclear power and natural gas in the EU Taxonomy as transitional activities.
Climate change adaptation refers to activities in sectors that, although cannot lead the transition, are in any way affected by climate change and can therefore be performed in a more sustainable manner. The aim is to make all economic activities more resilient to climate risks. This category includes enabling activities, which are not strictly sustainable themselves, but do enable the reduction of greenhouse gas emissions in other sectors.
Each activity has to meet certain requirements, theTechnical Screening Criteria (‘TSC’), to demonstrate their mitigation or adaptation efforts. Certain activities can only contribute to climate change mitigation and not to climate change adaptation (e.g., R&D activities for direct air capture),and vice-versa (e.g., healthcare activities). Other activities are included in both objectives, but with a different scope (e.g., infrastructure for transport services).
Water
In 2023, the Commission published the remaining four objectives (water, pollution, biodiversity and circularity). These objectives share a special connection, since they influence each other.
First, the sustainable use and protection of water and marine resources focuses on the damage caused by industrial activities on marine ecosystems and water quality, which in turn affects human health through water consumption. The TSC applicable to this category are concerned in reducing waste and improving water management. It is also important to reduce climate risks related to water, such as floods and droughts.
Pollution
This objectives includes pollution prevention and control in air, water, soil, living organisms and food resources. The main concern is human health, followed by biodiversity and its adverse impacts on economy as a whole. The EU has identified the most pollutant substances to avoid in the manufacturing of certain products. It is also very much related to the collection, transport and treatment of hazardous waste. The applicable TSC prescribe the adequate processes to prevent and control pollution in each eligible activity.
Biodiversity
The protection and restoration of biodiversity and ecosystems is essential for certain economic sectors, such as tourism, where the competitiveness of the market is directly related to the situation of existing natural resources. It is particularly important that all activities comply with the DNSH principle for this specific objective. When investing in real estate, the contribution TSC for this objective are primarily determined by the location of the construction. Activities located in or near biodiverse-sensitive areas must undergo a more in-depth assessment of their impact on the affected ecosystems.
Circularity
The activities under this category are those that contribute to the transition to a circular economy. The key factors here are the design and the production process, which should take account of the long-term value retention of the product, as well as its re-use and recycle potential. It must be possible to extend the life of the product with proper maintenance and to minimise waste or re-use it to avoid relying in excess on critical raw materials imported from third countries. In summary, the applicable TSC focus on longevity, reparability and re-use of products, as well as on recyclingprocesses.
The transition to a circular economy relies heavily on innovation to enable the above mentioned features. For that reason, this objective includes all digital solutions and product-as-a-service business models which make existing products and services more sustainable or the use of natural resources more efficient.
What this means for you
The EU Taxonomy is rapidly becoming the EU standard to define sustainable business activities. For investors (SFDR) and for companies (CSRD) it is clear that sustainability already has severe business implications that will only intensify in the future.
Although the latter four objectives mentioned have far fewer business activities than the former two, the scope is broader, meaning more businesses are eligible. The European Commission has also expressed its intention to include food and beverage activities, which are currently excluded, as well as many other sectors. Moreover, the social objectives are yet to be released.
In light of the above, complying with EU sustainability regulations has become one more competitive advantage due to the regulatory risks related to non-compliance and the reputational benefits of identifying as a sustainable market player.
Want to get ahead?
414 can assist in identifying and disclosing EU taxonomy eligibility and alignment.
