What exactly is the EU taxonomy?
Perhaps you’ve heard about it and are wondering exactly what the EU taxonomy is – and what it really means. SINTEF researcher Mathias Irgens is ready with an explanation.
In 2020, the EU launched the European Green Deal – an agreement with the overall aim of making Europe entirely climate-neutral by 2050.
“In order to achieve this, the EU has proposed a number of different strategies, one of which is an action plan for sustainable financial activity”, says SINTEF researcher Mathias Irgens who, among other things, works in the field of sustainable societies. “The foundation of the plan is the so-called EU taxonomy”, he explains.
In simple terms, the EU taxonomy is a classification system that says something about which business activities are sustainable, and which aren’t.
Helping investors to make the right choices
The EU taxonomy is a classification system that says something about which business activities are sustainable and which aren’t. The aim is to distinguish between activities defined as ‘green’ from those described as ‘brown’.
“Such a system will make it easier for investors to put their money into projects that are truly sustainable”, says Irgens.
There are currently a large number of investors and financial institutions looking to invest in green and sustainable projects, but who are finding it a challenge to be sure of which businesses are really operating sustainably.
“The EU taxonomy is intended to make it easier for investors to identify these businesses because the system will stipulate strict transparency and reporting requirements in connection with a company’s financial activities”, explains Irgens. “This transparency will enable investors to steer clear of businesses that do not qualify as ‘green’. It will also promote increased investment in projects that are truly ‘green’, thus helping to prevent so-called ‘greenwashing’ and contributing towards achievement of the aims of the Green Deal”, he says.
Coming to Norway soon
The EU taxonomy is thus a form of brand classification for green financial products that will enable us to distinguish between sustainable and non-sustainable capital management.
“In the future, the authorities will be stipulating requirements linked to a company’s reporting of its environmental and climate-related activities that will have to comply with a number of technical criteria set out in the taxonomy”, says Irgens. Some of these have already been enshrined in EU legislation”, he says.
Within the EU, some aspects of the taxonomy have already been put into effect. There had been plans in place in 2023 for non-financial Norwegian enterprises to report for the accounting year 2022, but these have been put on hold for a year.
“We’re lagging behind a little here in Norway due to delays in implementing EEA legislation”, says Irgens. As a result, some Norwegian businesses may choose to wait to submit reports before the taxonomy is fully integrated into Norwegian legislation. On the other hand, those that choose to report this year may be able to gain a competitive advantage”, he says.
Green is also profitable
Irgens is eager to remind us that the taxonomy is a classification system and not a set of regulations. It does not prohibit a company from either financing or conducting so-called ‘brown’ activities. However, it will promote changes in commercial behaviour by directing capital flows towards ‘green’ projects. This will make it more profitable to operate sustainable businesses and more expensive to invest in commercial activities that make no contribution to the transition to a low-emissions society.
“Businesses labelled as ‘brown’ will encounter problems in attracting investment capital”, says Irgens. “The taxonomy will also enable banks to offer better loan terms to ‘green’ businesses than to those that are ‘brown’”, he says.
Irgens believes that the EU taxonomy is good news, offering major opportunities to all businesses looking to operate sustainably.
“Sustainability will no longer be simply an ideological matter. It will now confer a competitive advantage. It represents a major opportunity to capitalise on the environmental initiatives being implemented around the world”, he says.
A company’s reporting requirements will be met as part of their mandatory Annual Accounts presentations, summarising their activity-driven revenues and expenditures.
The EU operates with a technical committee that will determine what in fact are sustainable activities within the various commercial sectors. In order to assess what is a sustainable activity, the following six environmental criteria have been established:
- Climate change mitigation. A company’s current impact on the climate.
- Climate change adaptation. Actions taken by the company that contribute to ongoing adaptation to climate change.
- The sustainable use and protection of water and marine resources.
- The transition to a circular economy, including actions taken to prevent waste generation, promote recycling and manage resource exploitation.
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems.
Three principal criteria
In order to ensure that a given activity can be regarded as sustainable within the taxonomy, three criteria will have to be met:
- The activity must make a significant contribution to at least one of the six environmental targets.
- At the same time, the activity must not have a negative impact on any of the other five targets. This is important in order to ensure that by mitigating one environmental problem, a company does not create another.
- It will also be necessary to meet the minimum requirements linked to social and governance conditions both in the workplace and the value chain.
What will the taxonomy mean for Norwegian businesses?
“In general terms, the taxonomy will mean that businesses will get an opportunity to put themselves in positions that will make it easier for them to attract investment capital and achieve competitiveness both now and in the future”, says Irgens, who is eager to encourage Norwegian businesses to see the taxonomy as an opportunity rather than just another set of reporting requirements.
The EU will revise and improve the taxonomy in response to any feedback it receives.
“For Norwegian businesses and organisations, it’s all about keeping themselves updated”, says Irgens. “This may represent a major challenge, so we’re recommending that all companies establish in-house expertise and learn how to address the relevant criteria. There’s little doubt that it will be very important for businesses to give their full attention to the EU taxonomy in the years ahead”, he says.