What is Green Taxonomy and what does it mean to your business?

10 Dec 2021

What is Green Taxonomy? 

 So what does Green Taxonomy actually mean? The meaning of taxonomy is to classify things into groups, while the word green is now synonymous with the environment and sustainability. The term Green Taxonomy essentially describes a system which categorises environmentally sustainable economic activities. 

EU flag-1The EU Green Taxonomy was created as part of the EU’s Sustainable Finance Action plan and came into force on 20 July 2020 as a classification system highlighting sectors aligning with Net Zero which are preferable to invest in to help Europe achieve carbon neutrality by 2050. It is the world’s first green list certification system that describes what can be considered “green” and what cannot. 

 It aims to standardise how companies can communicate environmental activities for their investors and to define for companies, investors and policy makers what constitutes sustainability. It should also provide security to investors and protect them from greenwashing, with a focus on helping companies to mitigate climate change and ensure investment is secured to produce a low-carbon, climate-resilient economy. 

Overall it offers a common language to achieve sustainable economic activities whereby investors can state what they expect from their investments, while companies can show their products are meeting sustainable and environmentally friendly goals. 

How does it work? 

For sustainable growth to be successful, the EU realised that the involvement of the private investment sector was vital. Encouraging investment into climate protection and the UN Sustainable Development Goals is key to tackling climate change. Through the creation of the EU Green Taxonomy and by defining sustainable economic activities, investors have a classification system enabling them to identify investment opportunities which also contribute towards the EU’s environmental policy and climate-change objectives. 

As investors will need to disclose how their sustainable funds align to the Green Taxonomy, so they will require the companies they invest in to show how their business aligns to the Taxonomy.  

Six environmental objectives have been outlined by the Taxonomy Regulation and a company will need to show how it contributes to at least one of them. The objectives are listed as:  

  1. Climate change mitigation
  2. Climate change adaptation 
  3. The sustainable use and protection of water and marine resources
  4. The transition to a circular economy
  5. Pollution prevention and control 
  6. The protection and restoration of biodiversity and ecosystems 

In addition to showing which of the six objectives they contribute to, a company will also have to show they “do no significant harm” (DNSH) to any of the other five Environmental Objectives. 

However, the EU Taxonomy is not limited to the environment. To be aligned, a company will also have to show they meet the minimum social safeguards of the OECD Guidelines on Multinational Enterprises which provides non-binding principles and standards for responsible business conduct in a global context consistent with applicable laws and internationally recognised standards and the UN Guiding Principles on Business and Human Rights which Implements the United Nations “Protect, Respect and Remedy” Framework. 

The Spanish multinational conglomerate, Acciona, S.A., a global group developing and managing sustainable infrastructure solutions, within renewable energy published a case study and report for investors, to show their activities attributing to climate change mitigation. 

It is hoped the Taxonomy will increase investment in more environmentally sustainable activities particularly in the areas currently representing 93.5 percent of the EU’s greenhouse gas emission, namely agriculture, buildings, ICT, manufacturing, transport, utilities, and finance. 

The EU will need to secure over €1 trillion over the next 10 years to support sustainable investments if it is to reach its low-carbon shift. 

 The EU Taxonomy Compass 

 An EU Taxonomy Compass has been developed to provide a visual representation of the contents of the EU Taxonomy. It enables users to confirm which activities are taxonomy-eligible, as well as the objectives to which they contribute and which criteria must be met. 

 The UK and Green Taxonomy 

The UK has been a forerunner with regards to environmental issues. It was the first country to set a legally binding climate change mitigation target in 2008 and the first major economy to set a net zero target in 2019. 

Earlier this year it announced the overseeing of the Government’s UK’s Green Taxonomy by the Green Technical Advisory Group ("GTAG"), which will define which investments are environmentally sustainable. The aim is to have the UK Taxonomy established by the end of 2022 and is part of the Government’s efforts to move towards net zero and create more green jobs. It will also help investors and consumers understand how a company is affecting the environment. 

 While it is expected to include some of the EU Green Taxonomy framework, it will also work towards a system that is “suitable for the UK market and consistent with UK government policy". GTAG will be chaired by the Green Finance Institute and made up of financial and business stakeholders, taxonomy and data experts, and subject matter experts drawn from academia, NGOs, the Environment Agency and the Committee on Climate Change.