In July 2020, the so-called European Green Taxonomy came into force, which has since taken on a crucial role in the transition towards a more sustainable and environmentally conscious economy. This legislative framework has had a significant impact on companies and investors. Therefore, in this article we tell you what you should know about the Green Taxonomy.
What is the European Green Taxonomy?
The European Green Taxonomy is a way for investors and companies to differentiate which projects have a negative impact on the climate and the environment. In other words, it is a classification system established by the European Union that determines whether an economic activity can be considered sustainable from a climate and environmental point of view.
This new taxonomy or classification is based on the recommendations of experts and scientists, and was created in order to facilitate and increase sustainable investment, eliminating greenwashing, a practice where companies provide misleading information about the sustainability of products or services.
Aims of the European Taxonomy
The main goals of the Green Taxonomy are to help and guide companies and investors to direct efforts towards the transition to a more sustainable economic model, in relation to high-level political commitments, such as the Paris Agreement and the European Green Pact.
It also aims to provide companies with a common frame of reference to facilitate the assessment and comparison of sustainable activities in different sectors and regions.
On the other hand, the regulation considers an activity to be sustainable if it complies with the list of these 6 objectives:
- Climate change mitigation.
- Adaptation to climate change.
- Sustainable use and protection of water and marine resources.
- Transition to a circular economy.
- Pollution prevention and control.
- Protection and recovery of biodiversity and ecosystems.
In relation to these objectives, the EU considers that companies should:
- Contribute to at least one of the six objectives described.
- Not cause significant damage to any of the objectives, while respecting basic human rights and labour rights.
- Comply with minimum social safeguards and not have a negative social impact.
- Comply with the technical screening requirements developed by the TSG (Technical Screening Group).
How the EU taxonomy affects companies
Following the adoption of this taxonomy, all large companies will be required to report on their alignment with the taxonomy, along with relevant information that can help investors assess their ESG performance. In this respect, the EU defines all large companies as any company that is not an SME. Small and medium-sized listed companies and investment funds, likewise, will have to report on the taxonomy alignment.
SMEs can also report on a voluntary basis, but will be affected by the forthcoming EU directive on corporate sustainability reporting.
Benefits of the European Green Taxonomy for companies
The Taxonomy provides companies with an unambiguous score of the level of sustainability of their activities. Based on this score and legal framework, they can improve their business and make it more sustainable.
On the other hand, companies can attract investors interested in sustainability, which is increasingly present in their activities.
Furthermore, having the indications of the criteria used in the taxonomy simplifies decision-making and planning, which avoids risks and makes it possible to take advantage of more opportunities.
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