Introduction to EU Sustainable Finance Taxonomy
Laura Houët
CMS: Co-Head of ESG
What is the EU Taxonomy, and how does it drive sustainable finance? Join Laura Houët as she explains its goals, disclosure requirements and its framework for defining environmentally sustainable activities.
What is the EU Taxonomy, and how does it drive sustainable finance? Join Laura Houët as she explains its goals, disclosure requirements and its framework for defining environmentally sustainable activities.
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Introduction to EU Sustainable Finance Taxonomy
10 mins 51 secs
Key learning objectives:
Understand the purpose and key objectives of the EU Taxonomy
Identify the main disclosure requirements for companies under the Taxonomy
Understand the DNSH principle and its application
Outline how the Taxonomy supports sustainable finance and industry alignment
Overview:
The EU Taxonomy is a classification system designed to define environmentally sustainable economic activities. It supports the EU's Green Deal by creating transparency for investors, combating greenwashing, and scaling sustainable investment. Companies must disclose the proportion of their turnover, CapEx, and OpEx related to Taxonomy-aligned activities, known as the "green asset ratio." Alignment requires substantial contribution to at least one environmental objective, adherence to the "Do No Significant Harm" principle, and compliance with social safeguards. The Taxonomy’s phased development prioritises key sectors like energy, transport, and manufacturing, with a framework that evolves to include new industries over time.
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Summary
What does the EU Taxonomy require companies to disclose?
The Taxonomy mandates specific disclosures from "in scope" companies, including:
Activities must meet technical screening criteria, make substantial contributions to at least one objective, do no significant harm (DNSH) to others, and comply with minimum social safeguards. Enabling activities, like renewable energy projects, and transition activities, like manufacturing with decarbonisation pathways, are also included.
What is the "Do No Significant Harm" (DNSH) principle?
The DNSH principle ensures that activities contributing to one environmental objective do not negatively impact others. For instance, a project mitigating climate change must avoid causing water pollution or biodiversity loss. Activities failing DNSH criteria are excluded from Taxonomy alignment.
How can the Taxonomy be used by lenders and investors?
The Taxonomy supports sustainable finance by:
Why is the EU Taxonomy a "living" framework?
The Taxonomy evolves with new sectors and activities continuously evaluated. This phased development allows the framework to integrate new data, refine criteria, and expand its scope over time, ensuring relevance and alignment with EU sustainability goals.
What is the EU Taxonomy, and why is it important?
The EU Taxonomy is a classification system designed to identify environmentally sustainable economic activities using a science-based framework. Introduced in 2020 as part of the European Green Deal, it aims to increase transparency, combat greenwashing, and shift investments towards sustainable technologies. It is central to the EU’s sustainable finance action plan and provides a common language for companies, investors, and policymakers to define "green" activities.
The EU Taxonomy is a classification system designed to identify environmentally sustainable economic activities using a science-based framework. Introduced in 2020 as part of the European Green Deal, it aims to increase transparency, combat greenwashing, and shift investments towards sustainable technologies. It is central to the EU’s sustainable finance action plan and provides a common language for companies, investors, and policymakers to define "green" activities.
What does the EU Taxonomy require companies to disclose?
The Taxonomy mandates specific disclosures from "in scope" companies, including:
- The proportion of turnover derived from Taxonomy-aligned activities
- The proportion of capital expenditures (CapEx) linked to these activities
- The proportion of operating expenditures (OpEx) related to these activities
These disclosures form the "green asset ratio," which quantifies the environmental sustainability of a company’s operations and investments. While qualitative reporting is also required, the primary focus is on quantitative metrics.
How does the Taxonomy classify economic activities?
The Taxonomy organises activities within six environmental objectives:
The Taxonomy organises activities within six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- Sustainable use of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection of biodiversity and ecosystems
Activities must meet technical screening criteria, make substantial contributions to at least one objective, do no significant harm (DNSH) to others, and comply with minimum social safeguards. Enabling activities, like renewable energy projects, and transition activities, like manufacturing with decarbonisation pathways, are also included.
What is the "Do No Significant Harm" (DNSH) principle?
The DNSH principle ensures that activities contributing to one environmental objective do not negatively impact others. For instance, a project mitigating climate change must avoid causing water pollution or biodiversity loss. Activities failing DNSH criteria are excluded from Taxonomy alignment.
Which sectors and industries are covered by the Taxonomy?
The Taxonomy initially prioritises sectors critical to climate objectives, including energy, transportation, manufacturing, and buildings. Technical screening criteria are developed in phases, tailored to each industry’s environmental impact. While the goal is to cover all sectors, ongoing evaluation ensures a systematic approach to expanding the framework.
The Taxonomy initially prioritises sectors critical to climate objectives, including energy, transportation, manufacturing, and buildings. Technical screening criteria are developed in phases, tailored to each industry’s environmental impact. While the goal is to cover all sectors, ongoing evaluation ensures a systematic approach to expanding the framework.
How can the Taxonomy be used by lenders and investors?
The Taxonomy supports sustainable finance by:
- Classifying portfolios and designing green financial products
- Setting portfolio targets for sustainable investments
- Reporting environmental sustainability using standardised criteria
- Assessing environmental risks in lending decisions
- Offering advisory services to clients for improving Taxonomy alignment
Why is the EU Taxonomy a "living" framework?
The Taxonomy evolves with new sectors and activities continuously evaluated. This phased development allows the framework to integrate new data, refine criteria, and expand its scope over time, ensuring relevance and alignment with EU sustainability goals.
What challenges exist in implementing the Taxonomy?
Key challenges include the complexity of technical screening criteria, the granular data required for compliance, and the ongoing need to balance industry-specific metrics with overarching sustainability goals. Despite these hurdles, the Taxonomy remains a foundational tool for guiding sustainable finance.
Key challenges include the complexity of technical screening criteria, the granular data required for compliance, and the ongoing need to balance industry-specific metrics with overarching sustainability goals. Despite these hurdles, the Taxonomy remains a foundational tool for guiding sustainable finance.
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Laura Houët
Laura Houët, Co-Head of ESG at CMS, has over 16 years of experience in the asset management industry. She advises international fund houses on sustainable investment strategies and governance, helping them navigate sustainability-related regulations like SFDR, TCFD, EU Taxonomy, CSRD, and UK's SDRs. She also provides strategic governance and internal preparation for climate transition. Laura serves on the CMS sustainability board committee and various industry bodies, contributing to the development of sustainable practices. She is a frequent speaker on sustainable investment issues.
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