The EU and UK Taxonomy- A Sustainability Pathway to 2050
Updated: Dec 14, 2020
Figure 1: The EU and UK Taxonomy aim to create sustainable economic growth. Source: Pixabay
With the adoption of national and international sustainability targets, governments are focused on directing capital into the support and growth of sustainable business.
In March 2020, the European New Deal established a sustainable growth strategy aimed at achieving net zero greenhouse gas emissions by 2050. Sustainable growth is decoupled from resource use and aligns all EU nations equally in the one agenda. On the 9th of November, reflecting Brexit, the UK Government announced the UK Taxonomy which provides for a similar sustainability target of 2050.
What you need to know about EU and UK Taxonomy?
The EU Taxonomy is a technical document which aims to support the economic transition for climate change in accordance with the widely referenced Intergovernmental Panel on Climate Change (IPCC) report.
The aim of the Taxonomy is to provide clarity to corporate and investment firms over what can be deemed as an environmentally friendly activity. It looks to do this by creating a common language which all businesses and investors can use to identify what is sustainable and what is not.
The UK Taxonomy is still in draft but will likely closely mirror the EU Taxonomy.
What are the aims of the Taxonomy?
The Taxonomy aims to provide:
A common classification for sustainable activities and investment practices
Sector specific clarity on what it takes to meet the commitments of the Paris Agreement
Context for environmental data and expectations for alignment
Rewards for organisations that follow the framework
A standardised comparison of green finance products and services
Six environmental objectives
To align with the Taxonomy, economic activities must significantly contribute to one of the 6 environmental objectives whilst not significantly harming any of the others.
Figure 2: The six environmental objectives of the EU Taxonomy
Like many of the existing sustainable investment strategies, alignment with the Taxonomy requires social and governance safeguards to be met.
How does this affect business and finance?
The Taxonomy supports three legislative initiatives, Reporting, Disclosure, and Green Labelling. These will directly implicate large corporates and the financial sector.
Financial market participants must state the extent to which their products align with the Taxonomy if their products are advertised as having environmentally sustainable objectives. If no alignment exists, the product must also state this.
Any turnover, capital or operational expenditure from companies under the scope of the NFRD (Non-Financial Reporting Directive) which are associated with Taxonomy-aligned activities, will have to be disclosed. This is aimed at encouraging corporates to invest and deliver returns from sustainable activities, and to provide the data to enable this.
Eco-labels for financial products are set to be introduced depending on the extent of alignment with the EU Taxonomy. Details of these labels are yet to be set, but they will include standards for green debt and Green Bonds.
Preparing for the Taxonomy
To best prepare companies should:-
Evaluate their climate mitigation or adaption performance, and understand how this is being measured
Familiarise themselves with the sustainability criteria of the Taxonomy
Understand and evaluate environmental data reporting to ensure decision-useful outcomes
Benchmark performance against the Taxonomy and review performance relative to competitors
If you’d like to discuss the implications of the EU and UK Taxonomy, please get in touch.
Governex is an ESG advisory business that helps businesses with corporate governance as well as answering the question of how they make positive contribution to the environment and social issues.
We help organisations implement the right shift in focus from a purely financial commitment to include environmental, social and governance commitments. All in the context of meeting business purpose, strategy, integrity and diversity.
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