The EU taxonomy regulation for responsible finance

Imagine a world where your investments are not just about profits, but also about making your businesses more responsible and making a positive impact on our planet! That’s the vision for the EU Taxonomy regulation!

In this article, we delve into the ins and outs of the EU Taxonomy, exploring its origins, objectives, and implications for various stakeholders. From its conceptual framework to its practical applications, we aim to provide you with a thorough understanding of this groundbreaking regulation and its transformative impact on sustainable finance.

In order to achieve the EU's climate and energy targets outlined in the EU Green Deal, we must allocate investments towards sustainable initiatives and activities. To do this, a consistent language and a clear definition of what 'sustainable' means, is required. The action plan on funding sustainable growth aims to establish a standard classification system for sustainable economic activity, known as a EU Taxonomy.

In June 2023, it was proposed to update the EU Taxonomy Regulation (2020) to include economic activities on the list of those significantly contributing to climate change mitigation and adaptation goals, as well as to clarify the reporting duties for the additional activities. It provides a standardized framework for defining environmentally sustainable economic activities, facilitating the scaling up of sustainable investments and enhancing investor confidence by combatting greenwashing.

The European Commission has developed a specific criteria consisting of 6 environmental objectives, ensuring clarity and consistency in identifying sustainable activities across industries.

The EU Taxonomy regulation applies to both financial and non-financial companies operating within the European Union.

Financial companies can include:

• Banks,
• Investment firms
• Insurance companies
• Pension funds

Non-financial companies may include those that operate in the following industries:

• Manufacturing (Fashion & Textiles)
• Energy
• Transportation
• Agriculture

The EU Taxonomy is linked to the obligation for non-financial reporting under the CSRD therefore, applies also to the following companies:

• All listed companies
• All large companies with 2 out of 3 criteria
• Turnover EUR 40 million
• Balance sheet total 20 million
• > 250 employees

Compliance with the regulation is crucial for companies aiming to demonstrate their commitment to sustainability, access sustainable finance, and mitigate risks associated with greenwashing.

As of January 2024, financial and non-financial companies will face additional reporting obligations under the EU Taxonomy framework. As a business, you must report on your economic activities that are considered environmentally sustainable according to the taxonomy criteria.

As a business, you can begin your journey towards compliance with the EU Taxonomy regulation by first conducting a full-scope assessment of your supply chain and operations. This involves identifying areas where your activities align with the taxonomy criteria for responsible practices, such as using sustainable materials, reducing carbon emissions and implementing circular economy principles.

Then think - are there any areas in which I could introduce more responsible practices? This could include transitioning to renewable energy, introducing a take-back/recycling scheme etc.

Additionally, it’s just as important to transparently communicate on your sustainability efforts and AVOID GREENWASHING in order to comply with the regulations reporting obligations. To help with this, the European Commission has developed an EU Taxonomy Calculator to assist businesses in understanding and complying with the regulation's reporting responsibilities.

So, what are the benefits of the EU Taxonomy…

• It has a standardized framework that provides clarity and consistency for companies and investors alike.
• It promotes transparency. By promoting transparency, the taxonomy enhances trust and confidence in sustainable finance, encouraging greater investment in environmentally friendly activities.
• And it encourages innovation and responsible finance incentives by rewarding companies that align with its criteria.

However, there are also challenges associated with the EU Taxonomy which include:

• It’s a complex framework, making compliance daunting for companies, requiring significant resources for assessment and documentation.
• There is a risk of greenwashing, where companies may misrepresent their activities as sustainable to capitalize on the taxonomy's incentives without implementing substantive changes.
• And it can be costly moving to more sustainable practices, especially for smaller enterprises with limited resources.

The EU Taxonomy regulation serves as a pivotal tool in advancing sustainability within the financial sector, and as companies navigate the complexities of compliance, it’s essential to recognize the long-term benefits of aligning with the regulation’s criteria!

At RethinkRebels we are committed to supporting businesses in their journey towards responsible and regulatory compliance. Explore our services tailored to help companies, such as yourself, navigate the EU taxonomy and drive meaningful impact in creating a more responsible future!

Additionally, don't forget to check out our Instagram reels highlighting key insights and updates on the EU Taxonomy, providing bite-sized content for easy understanding.