The EU ‘Green’ Taxonomy for sustainable activities

Wed 17 Nov 2021

What is it?

The taxonomy is intended to define activities which qualify as green. It is a classification system that sets out a list of environmentally sustainable economic activities and is planned to help the EU implement the European Green Deal. The initial focus is on two areas: i) climate change mitigation; and ii) climate change adaptation (i.e. reducing carbon emissions and protecting people, the environment or assets from the impact of climate change respectively).  This focus is then intended to be broadened to cover four additional areas: iii) sustainable use and protection of water and marine resources; iv) transition to a circular economy; v) pollution prevention and control; and vi) protection and restoration of biodiversity and ecosystems.

The aim of the taxonomy is to provide companies, investors and policymakers with appropriate definitions or thresholds for which economic activities can be considered environmentally sustainable, and hence it should create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments where they are most needed.

For each category, a number of activities are potentially eligible.  These cover more obvious green activities, such as generation of electricity from solar power or wind, but also those which use substantial energy, such as manufacture of cement or aluminium.  Many of these activities have defined ‘Technical Screening Criteria’ (TSCs), which set the thresholds for an activity to count as green – e.g. CO2 emissions per tonne levels of product for cement.  Others, such as manufacture of renewable energy technologies, qualify without thresholds.  These potentially eligible activities do not cover the entire economy however, but only those required, or required to change, to reduce carbon emissions.

Any activity classified as ‘green’ in one of the six categories noted above must also “do no significant harm” (DNSH) in the other five areas and meet minimum social safeguards to qualify.

What will the information be used for?

Having defined green activities, the EU has mandated that companies disclose their green activities through the publication of a set of measures covering the proportion of revenue, capex and operating expenditure meeting the green thresholds and that fund managers use this data to report on the proportion of their funds qualifying as green.

The aim is to drive funding toward environmentally sustainable activities and away from those considered unsustainable, to encourage the greening of the economy.  Current classifications cover a relatively small proportion of the economy however, omitting activities with less direct impact, for example retail, so the number of companies showing a high proportion of green activities is expected to be relatively small.  It is also worth noting that, since the taxonomy focuses on areas which can be improved or have a green alternative, those which have no green counterpart, for instance coal mining, are also omitted from the classification.

Who is it applicable to?

The regulations for non-financial companies apply to companies reporting under the Non-Financial Reporting Directive (NFRD).  When the taxonomy was initially published, this covered public interest entities (i.e. listed companies, banks and insurance companies) with more than 500 employees.  The Non-Financial Reporting Directive is about to be broadened, however, to cover all listed companies and companies defined as ‘large’, hence applying to a much wider group of businesses. Large being companies meeting at least 2 of the 3 criteria: turnover of more than €40M; total assets of more than €20M; or employees of more than 250.

What needs to be published?

Companies need first to identify eligible activities, then work out which of them pass the screening (TSC) and DNSH criteria.  For each of three measures: revenue, capex and operating expenditure, the proportion of green activities is expressed as a proportion of total revenue, capex or operating expenditure.  The detail required does not stop here, however.  The annexes to the Regulations provide for companies to explain both changes and make-up of these measures in some detail and for a breakdown of the numerator of each measure by each qualifying and potentially qualifying activity.  The resulting disclosure could potentially be substantial for a large group undertaking a wide range of activities. 

While the regulation and its annexes lay out much of the detail of calculation, given the speed with which this legislation has been published, full guidance is not available and the precise detail of various calculations may well still be unclear as companies begin to publish data for years from 2022.

Further information: For further information, refer to the European Commission’s website.