This informal CPD article, ‘Demystifying the EU Taxonomy: A Simplified Guide to Green Investments' was provided by FBRH Consultants, who aim to help businesses gain value by operating in much cleverer, sustainable ways.
The EU Taxonomy is a classification system developed by the European Union to determine whether an economic activity is environmentally sustainable. The taxonomy aims to provide clarity and transparency on what activities contribute to the EU's sustainability objectives.
The EU taxonomy makes it possible for both financial and non-financial companies to share a common definition of economic activities that can, and should, be regarded as environmentally sustainable, defining criteria for economic activities that are aligned with a net zero trajectory by 2050 and wider global environmental goals other than climate. In this way, the EU taxonomy, as a key market transparency tool, plays a very important role in helping the EU scale up sustainable investment. This is achieved by, for example, creating security for investors, protecting private investors from greenwashing, helping companies become more climate-friendly and mitigating market fragmentation.
The EU Sustainable finance action plan might initially seem like a complicated set of rules and the centre piece, taxonomy, can seem daunting. In fact, the EU taxonomy is a disclosure standard that allows fund managers to demonstrate how their funds are allocated. The Taxonomy is a tool with which financial players can describe their activities.
A fund manager, for example, will be able to say:
60% of my fund is in sustainable activities,
10% is transition activities,
15% is enabling activities and
15% is other activities.
The EU Taxonomy categorizes economic activities into four bands:
Sustainable Activities: This band includes economic activities that substantially contribute to one or more of the environmental objectives outlined in the EU Taxonomy Regulation. These objectives include climate change mitigation and adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
Transition Activities: This band comprises economic activities that make a significant contribution to the EU's environmental objectives but have not yet reached the thresholds required to be considered fully sustainable. These activities are in transition towards sustainability and are expected to align with the criteria defined by the EU Taxonomy in the future.
Enabling Activities: This band includes economic activities that provide products, services, or technologies that substantially contribute to enabling other activities to meet the EU's environmental objectives. Enabling activities may not directly contribute to the objectives themselves but play a crucial role in supporting sustainable and transition activities.
Other Activities: This band covers economic activities that do not fall into any of the previous three bands. These activities are not aligned with the EU's environmental objectives or do not yet have sufficient information available to assess their sustainability. The purpose of this band is to highlight activities that require further analysis and development to determine their environmental impact.
Living Framework: It's important to note that the EU Taxonomy is a living framework, and the classification of activities may evolve over time as more information becomes available and as the EU updates its environmental objectives and criteria.
We hope this article was helpful. For more information from FBRH Consultants, please visit their CPD Member Directory page. Alternatively, you can go to the CPD Industry Hubs for more articles, courses and events relevant to your Continuing Professional Development requirements.
For more information from FBRH Consultants, please visit their CPD Member Directory page. Alternatively please visit the CPD Industry Hubs for more CPD articles, courses and events relevant to your Continuing Professional Development requirements.