BACKGROUND

The new European Union (EU) growth strategy known as the European Green Deal is the EU’s response to some of the main global challenges faced by the current generation. By turning these challenges into opportunities, the EU Green Deal aims at transforming the EU into a modern, resource-efficient, and competitive economy and ensuring: (i) climate neutrality by 2050; (ii) economic growth decoupled from resource use; and (iii) that no person or place is left behind. Achieving the ambitions set by the European Green Deal means significant investment and therefore the EU has enhanced its efforts to connect finance with the specific needs of the European and global economy.

To this end, the EU has since 2018 been developing a comprehensive policy agenda that resulted in a well-developed regulatory landscape that lays down the three building blocks of the EU sustainable finance framework: (i) a harmonised, robust and science-based classification system, or “taxonomy”, of sustainable activities, allowing non-financial and financial organisations to share a common definition of sustainability and thereby providing protection against greenwashing; (ii) a mandatory disclosure framework for both non-financial and financial organisations, providing investors with sustainability information to make informed sustainable investment decisions; and, (iii) investment tools, including benchmarks, standards and labels, providing greater transparency and supporting the financial sector to align their investment strategies and business models with the EU’s climate and environmental objectives.

Specifically, the EU Taxonomy has been introduced at the EU level with the aim to facilitate the shift towards sustainable investments by setting up uniform criteria for determining whether an economic activity qualifies as environmentally sustainable. For the purpose of determining the environmental sustainability of a given economic activity, an exhaustive list of technical screening criteria have been laid down by the EU Taxonomy, covering six environmental objectives, namely: climate change mitigation and climate change adaptation; the sustainable use and protection of water and marine resources; the transition to a circular economy; pollution prevention and control; and the protection and restoration of biodiversity and ecosystems. 

The EU Taxonomy is also a disclosure tool, with companies being required to provide in their annual reports, information on the taxonomy eligibility of their revenues, investments, and operating expenses, as well as taxonomy alignment based on 3 KPIs: Turnover (net turnover refers to the amounts derived from the sale of products and services after the deduction of sales rebates, value-added tax, and other taxes directly linked to turnover), Capex (Classified as additions to tangible and intangible assets during the financial year) and Opex (direct expenditures relating to the day-to-day servicing of assets of the property, plant, and equipment that are necessary to ensure the continued and effective use of such assets). The Taxonomy requires that the financial sector shall disclose the Green Assets Ratio (GAR), which is a ratio showing EU Taxonomy-aligned financial assets as a percentage of the total assets of the financial organisation.

According to the EU Taxonomy and for the purposes of establishing the degree to which an investment is environmentally sustainable, an economic activity shall qualify as environmentally sustainable where that economic activity: (i) contributes substantially to one or more of the environmental objectives (SC); (ii) does not significantly harm any of the other environmental objectives (DNSH); (iii) is carried out in compliance with the minimum safeguards; and (iv) complies with technical screening criteria set up at European Union level through Delegated Acts.

The approved Delegated Acts establish detailed criteria for determining both substantial contribution and do-no-significant harm. When assessing an economic activity against the criteria, both the environmental impact of the activity itself and the environmental impact of the products and services provided by that activity throughout their life cycle shall be considered, in particular by considering the production, use, and end of life of those products and services.