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EU Taxonomy for Sustainable Activities

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Description of Characteristics:

  • EU Classification System: The EU Taxonomy is a classification system that establishes criteria for determining whether an economic activity is environmentally sustainable.
  • Science-Based: The Taxonomy is based on scientific evidence and technical screening criteria to identify activities that make a substantial contribution to environmental objectives.
  • Transparency and Comparability: The Taxonomy aims to create a common language for sustainable investments, promoting transparency and comparability across the EU financial market.
  • Focus on Environmental Sustainability: The Taxonomy currently focuses on six environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.  
  • Evolving Framework: The Taxonomy is a dynamic framework that will be updated and expanded over time to include additional environmental objectives and social criteria.

Targeted Audience:

  • Financial Market Participants (FMPs): Asset managers, investment firms, insurance companies, pension funds, and other financial institutions operating in the EU.
  • Companies: Companies seeking to demonstrate the environmental sustainability of their activities and attract sustainable finance.
  • Investors: The Taxonomy provides investors with a tool to identify and compare environmentally sustainable investments.

Specific Criteria:

  • Six Environmental Objectives:
    • Climate change mitigation
    • Climate change adaptation
    • Sustainable use and protection of water and marine resources  
    • Transition to a circular economy
    • Pollution prevention and control
    • Protection and restoration of biodiversity and ecosystems  
  • Technical Screening Criteria: For each environmental objective, there are detailed technical screening criteria that an economic activity must meet to be considered environmentally sustainable under the Taxonomy.
  • Minimum Safeguards: Activities must also comply with minimum safeguards to ensure they do not significantly harm any of the other environmental objectives or social principles.

Reporting Principles:

  • Transparency: Companies and financial market participants are required to disclose how and to what extent their activities align with the Taxonomy.
  • Comparability: The use of a common classification system promotes comparability of sustainability-related information across different entities and financial products.
  • Science-Based: The Taxonomy is based on scientific evidence and technical screening criteria, ensuring a robust and credible assessment of environmental sustainability.

Reporting Process (for Financial Market Participants):

  1. Identify Eligible Activities: FMPs assess which of their economic activities are eligible for Taxonomy alignment.
  2. Apply Technical Screening Criteria: Determine whether the eligible activities meet the technical screening criteria for the relevant environmental objectives.
  3. Assess Minimum Safeguards: Ensure that the activities comply with the minimum safeguards.
  4. Calculate Taxonomy Alignment: Calculate the proportion of the FMP’s activities or investments that are Taxonomy-aligned.
  5. Disclose in accordance with SFDR: Include Taxonomy alignment information in their SFDR disclosures.

Connections to Other Frameworks:

  • Linked to SFDR: The EU Taxonomy is directly linked to the Sustainable Finance Disclosure Regulation (SFDR), which requires financial market participants to disclose the Taxonomy alignment of their financial products.
  • Complementary to other ESG frameworks: The Taxonomy can be used in conjunction with other ESG frameworks, such as GRI and SASB, to provide a comprehensive assessment of sustainability performance, particularly in relation to environmental objectives.

Challenges:

  • Complexity: The technical screening criteria can be complex and require specialized knowledge to apply.
  • Data Availability: Gathering the data required to assess Taxonomy alignment can be challenging, especially for complex value chains.
  • Evolving Framework: The Taxonomy is still under development, with ongoing updates and expansions, requiring companies and FMPs to stay informed and adapt their reporting processes.

Compliance Guidance:

  • EU Taxonomy Regulation: The official text of the Taxonomy Regulation provides the legal framework and requirements.
  • Technical Screening Criteria: The European Commission has published detailed technical screening criteria for each environmental objective.
  • Platform on Sustainable Finance: This platform provides additional guidance and resources on the Taxonomy.

Usability Evaluation:

  • Level of Global Adoption: While specific to the EU, the Taxonomy’s influence is growing globally as investors and companies seek to demonstrate their commitment to environmental sustainability.
  • Ease of Use: Can be challenging due to the technical nature of the screening criteria and the need for specialized expertise.
  • Focus Areas: Focuses specifically on environmental sustainability, with future plans to include social criteria.
  • Data Availability: Data availability can be a challenge, particularly for complex value chains and emerging technologies.

SyncFrame Compatibility:

  • Alignment: SyncFrame’s focus on impact measurement, data-driven insights, and environmental sustainability aligns well with the objectives of the EU Taxonomy.
  • Data Integration: SyncFrame can facilitate data collection and analysis for assessing Taxonomy alignment.
  • Expert Guidance: SyncFrame advisors can provide support in navigating the complexities of the Taxonomy and its technical screening criteria.

SyncFrame’s alignment with the EU Taxonomy, along with its focus on impact measurement and data-driven insights, can help organizations navigate the complexities of this framework and position themselves as leaders in sustainable finance and business practices.

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