ESG – Taxonomy Overview

The Taxonomy Regulation sets the criteria for determining if and to what extent an economic activity qualifies as environmentally sustainable. The aim is to prevent distribution of a financial product as environmentally friendly, where such product does not meet environmental standards (greenwashing).

Under the Taxonomy Regulation, an economic activity shall qualify as environmentally sustainable where that economic activity contributes substantially to one or more of the environmental objectives, does not significantly harm any of the environmental objectives, is carried out in compliance with the minimum safeguards, and complies with technical screening criteria.

For each environmental objective, the Taxonomy Regulation (along with technical screening criteria) defines what exactly is understood as a substantial contribution. For example, an economic activity shall qualify as contributing substantially to climate change mitigation where that activity contributes substantially to the stabilization of greenhouse gas concentrations in the atmosphere at a level which prevents dangerous anthropogenic interference. Such contribution can be facilitated by

• generating, transmitting, storing, distributing, or using renewable energy
• improving energy efficiency
• increasing clean and climate-neutral mobility
• switching to the use of sustainably sourced renewable materials 
• increased use of environmentally sound technologies

An economic activity is environmentally sustainable only if it substantially contributes to at least one environmental objective while – at the same time – it does not significantly harm any other environmental objective. One objective must not be fostered at the detriment of other objectives, considering the entire life cycle of products and services.

An economic activity can further only be classified as environmentally sustainable if it is delivered in accordance with minimum social standards and a good governance structure. Compliance requires the implementation of procedures to ensure alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights.

Any undertaking subject to an obligation to publish non-financial information shall include in its non-financial statement or consolidated non-financial statement information on how and to what extent the undertaking’s activities are associated with economic activities that qualify as environmentally sustainable.  Non-financial undertakings shall disclose the following:

• The proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable.
• The proportion of their capital expenditure and the proportion of their operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable.

The turnover-based disclosure is meant to measure the extent to which an economic activity is already taxonomy aligned. Capital and operating expenditures reflect investments to improve environmental sustainability. Both proxies raise significant concerns and questions in practice. In the banking sector, a green asset ratio (GAR) shall be applied instead.

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