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European taxonomy

The European Taxonomy: a framework for the ecological transition

Taxonomy or European Taxonomy. This term is on everyone's lips and intends to impose a new framework at European level for more virtuous investments and economic activities.

But what are we talking about?

Why a European Taxonomy?

Although the implementation of the European Taxonomy is complex, its objectives are simple. It's about speaking a common language regarding investments and their ecological value, avoiding greenwashing.

In addition, this framework aims to allow companies to assert their position in relation to the ecological transition and offer more transparency to investors, to ensure that an investment is “green”.

The European Taxonomy aims to achieve carbon neutrality and respect the Paris Agreements (horizon 2050), in particular by reducing the carbon footprint of buildings (application of the Taxonomy in real estate).

By simplifying access to this extra-financial information, investors are therefore encouraged to choose more virtuous investments.

taxonomy definition

The objectives of the European Taxonomy in a few words:

  • Standardize the communication of information on the “sustainable” part of an economic activity.
  • Give investors confidence and encourage them to make virtuous investments.
  • Encourage those required to communicate their extra-financial data to make themselves more attractive and advance their CSR strategy.
sustainable economy taxonomy

What is the European Taxonomy?

The European Taxonomy is defined as a unified classification system for economic activities, determining whether they can be sustainable. This makes it possible to account for the proportion of “green” activities of an entity.

The European Commission launched the European Taxonomy in 2018 to find a common definition of sustainable economic activity. Financial flows are thus directed towards sustainable investments with reliable and more readable information.

To know if an activity is “sustainable” you must examine 6 environmental objectives :

  • Climate change mitigation
  • Adaptation to climate change
  • Sustainable use and protection of aquatic resources
  • Transition to a circular economy
  • Pollution prevention and control
  • Protection and restoration of biodiversity and ecosystems.

AND for it to be qualified as sustainable, the activity must respect 3 cumulative criteria (principle of Do No Harm ):

  1. Contribute to at least one of these six objectives
  2. Do not cause significant harm to the other five objectives
  3. Respect minimum social guarantees.

Note :

Apart from activities that directly contribute to an environmental objective, there are two other activities also taken into account in the taxonomy: transitional activities and enabling activities.

The first are activities for which there are no low-carbon alternatives but whose activity helps accelerate the ecological transition. This is particularly the case for the building renovation sector.

Enabling activities, for their part, have a central role in achieving environmental objectives because they help others achieve their environmental objectives. For example, companies that install electric charging stations.

Who is affected by the European Taxonomy?

European Commission - Taxonomy

The European Taxonomy concerns more than 90 different economic activities; which represents 93% of GHG emissions on the European continent!

You should know that an activity is considered sustainable when it emits less than 100g of CO2/kWh (threshold set by experts from the European Commission).

 

In France, the following are concerned:

  • Companies concerned by 2 of these 3 criteria (already obliged to communicate their environmental performance with extra-financial reporting = DPEF): 500 employees, €100 million in turnover, €100 million in total balance sheet. There is already talk of reviewing these criteria from 2026: 250 employees, €40 million turnover, €20 million total balance sheet . Listed SMEs will also be affected.
  • Financial market players (central banks, asset managers, insurance companies, etc.).
  • Member states when applying public measures, standards or labels concerning green financial products or green bonds.

Did you know ?

Buildings wishing to benefit from European funds (from local authorities as part of a renovation for example), must aim for very high energy performance in order to respect the Taxonomy framework.

What are the deadlines within the framework of the European Taxonomy?

The European Taxonomy came into force in January 2022. At the end of 2022 only objectives 1 – climate change mitigation and 2 – adaptation to climate change were the subject of a delegated act making the European green taxonomy officially applicable.

From January 1 , 2023, players in the real estate sector are subject to a regulatory obligation to publish their alignment indicators according to the criteria defined upstream.

It is planned that all the provisions will be voted on and applied at the beginning of 2024 (for the 4 other remaining criteria).

2024 will also mark the entry into force of the CSRD extended to the 50,000 largest European companies.

The European Green Taxonomy will be revised every 3 years.

European taxonomy
green investment

CSRD, what is it?

The Corporate Sustainability Reporting Directive (CSRD) will replace the Non-Financial Reporting Directive (NFRD) of 2014, concerning extra-financial reporting. This CSR directive reinforces commitments for a sustainable economy and is aimed at all so-called “non-financial” companies. The latter are logically opposed to financial companies such as banks, institutional investors, insurers, etc.

The companies concerned will have to publish standardized information on the “sustainable” part of their activities , according to the criteria defined by the Taxonomy. This “obligation” is ultimately beneficial for all stakeholders because the more sustainable the part of the activities (missions, organization, information systems, etc.), the more attractive the company will be (financing, customers, suppliers, etc.).

In other words, the companies concerned are encouraged to reduce the environmental and social impact of their activities, in order to make themselves more attractive to investors who want to move towards sustainable activities.

For the moment, this concerns more than 50,000 European companies. Reporting will begin in 2025 for the year 2024.

What we remember:

  • Standardized and simplified reporting
  • Better understanding between stakeholders (investors, companies, customers)
  • A sustainable economy on a European scale
  • Improved CSR strategy.
virtuous investments