Understanding The EU Taxonomy And Its Environmental Impact

October 8, 2024
Understanding The EU Taxonomy And Its Environmental Impact

As the world races against the clock to tackle climate change, businesses face increasing pressure to align their operations with ambitious environmental goals. In this new era where sustainability is no longer optional but a necessity, adopting the EU Taxonomy becomes a critical strategy for not only complying but also succeeding in a quickly changing market. The key to unlocking these opportunities lies in understanding how this transformative framework can reshape your company’s approach to sustainability. Ready to future-proof your business and get the benefits? Let us look at how the EU Taxonomy might help drive your sustainable journey.

What is the EU Taxonomy?

The EU Taxonomy is a categorization system that assists business and investors in identifying “environmentally sustainable” economic activities to make informed investment decisions. This tool was created to promote a transition to a zero-carbon future and guide funding towards solutions to tackle the climate crisis and prevent further environmental degradation.  

While it is not meant to be compulsory for decision makers to use it, it is expected to take a bigger role in the transition towards sustainability.  By regularly updating the Taxonomy, the EU aims to keep the tool relevant while fostering transparency and confidence.  

What classifies as an “environmentally sustainable” economic activity?

The EU Taxonomy classifies different economic activities by determining the degree of sustainability it reflects. Economic activities are classified as “sustainable” or “green” when they:

  1. Make a substantial contribution to at least one of the EU’s climate and environmental objectives;
  1. And do not significantly harm any of the other objectives, while meeting minimum safeguards in regard to human rights and labor standards.

The six environmental objectives established by the Taxonomy are:

Once activities are classified as sustainable, another categorization comes into place: enabling activities and transitional activities. The latter were added to allow efforts which may not previously be deemed sustainable to contribute to the overarching goal of increasing sustainability. Therefore, each type contributes to the sustainable transition in different ways.

  • Enabling Activities: These are activities that directly enable other sectors or industries to make substantial contributions to one or more of the six environmental objectives. Enabling activities must not lead to environmental harm in the long term, meaning they cannot lock in assets or practices that would undermine future environmental goals. Example: technology or infrastructure that supports renewable energy production.
  • Transitional Activities: These are economic activities for which low-carbon alternatives are not yet technically or economically viable, so improvements are made by using the best-available technology to reduce emissions. They are meant to gradually phase out carbon-heavy practices while pushing toward more sustainable solutions. Transitional activities are typically found in sectors where decarbonization is challenging, like cement or steel production.
    Example: Using alternative fuels (e.g., biomass) to replace fossil fuels in kilns.

How Companies Can Benefit from Compliance

As mentioned before, this tool does not set mandatory requirements on environmental performance for companies or for financial products. Investors are free to choose what to invest in. But by adhering to the Taxonomy, businesses can have a clearer and more transparent definition of what “sustainable” or “green” means.

In essence, it creates a frame of reference for both investors and companies, supporting businesses in their efforts to plan and finance their transition. Additionally, by creating this frame of reference, the Taxonomy prevents greenwashing practices, helping to accelerate the financing of projects that are already sustainable, as well as those required for the transition to a low-carbon economy.

Compliance with the EU Taxonomy can benefit companies in various ways:

By embracing the EU Taxonomy, companies can strengthen their market position, attract investment, and future-proof their operations in a global economy that increasingly values sustainability.

Next Steps: Preparing for Reporting and Audits  

To get these benefits, companies need to make sure they adhere effectively to the EU Taxonomy and take deliberate steps to integrate it into their operations. Below we will go a bit more in detail into how they can do this.  

Step 1: Identifying Eligible Activities

A good starting point is mapping out your activities and assessing if any of the company’s operations meets the criteria to be classified as “taxonomy-eligible”. For better guidance during this step, companies can always refer to the EU Taxonomy Compass, a visual tool that simplifies access to the contents of the EU Taxonomy. It displays all activities covered in the Climate Delegated Act and Complementary Climate Delegated Act, making it easier to integrate the criteria into business databases and IT systems while ensuring alignment with both environmental and social standards.

Example: A manufacturer might find that while they use renewable energy, they still need to improve energy efficiency in their processes to fully align with the Taxonomy. Services like sourcing Power Purchase Agreements (PPAs) or Guarantees of Origin (GOs) can help them meet sustainability thresholds.

Step 2: Gap Analysis

Once you have identified the eligible activities within the company’s operation, a gap analysis should follow, to determine where they currently stand in relation to the systems’ criteria. This involves analyzing both the environmental performance and reporting standards, as well as identifying areas where improvement is needed to align with Taxonomy requirements. During this step, you should also consider the Do No Significant Harm (DNSH) Criteria, ensuring your operations do not significantly harm any of the other environmental objectives.  

Example: A manufacturer may discover that, after having implemented some sustainable practices, their energy consumption or emissions still exceed the Taxonomy thresholds. To reduce these gaps, they could incorporate renewable energy procurement or invest in carbon credits to minimize their carbon footprint and meet compliance requirements.

Step 3: Implement Data collection and Monitoring Systems

Businesses must have reliable data collecting and monitoring systems in place to meet Taxonomy's disclosure obligations. This includes compiling reliable data on energy consumption, carbon emissions, and other environmental effects. Implementing a unified system for tracking sustainability measures will improve transparency in reporting and make it easier to verify compliance during audits.  

Example: A construction company could use software to track energy use across projects, ensuring they meet the required thresholds for energy efficiency and emission reduction. Carbon offsetting tools or renewable energy tracking platforms can assist in real-time monitoring for CSRD reporting.

Step 4: Engage Stakeholders

Communicate with stakeholders, including investors, employees, and customers, about the company’s sustainability initiatives and progress. Companies should train employees on the importance of the Taxonomy and how their roles contribute to achieving these objectives.

Example: A retail company could organize workshops to educate employees and suppliers on sustainable practices and the benefits of EU Taxonomy compliance. Tailored sustainability workshops and communication materials can ensure all stakeholders understand and support these initiatives.

Step 5: Prepare for Audits

Ensure that all documentation and reporting are accurate and readily available for audits. Regular audits will help verify compliance and identify areas for further improvement. OTC Flow offers a number of services that ensure your company stays ahead of the compliance curve. We can verify your market-based renewable energy use through certified Guarantees of Origin, provide high-quality biofuels and biomethane with Proofs of Sustainability, and help offset your Scope 3 emissions through the provision of carbon credits.  

Conclusion

Aligning with the EU Taxonomy is more than just a compliance measure; it is a strategic opportunity for businesses to strengthen their market position and drive long-term sustainability. Companies that adhere to the Taxonomy can attract sustainability-focused investors, improve their access to green financing, and strengthen their brand in an increasingly eco-conscious market.  

As global environmental regulations tighten, early adoption of the EU Taxonomy provides a competitive advantage by keeping enterprises ahead of regulatory developments. Furthermore, using tools like the EU Taxonomy Compass, businesses may effectively integrate sustainable criteria into their operations, paving the way for more efficient reporting and audits.

At OTC Flow we offer tailored solutions to help companies identify sustainable activities, procure the necessary renewable energy or carbon credits, and navigate complex reporting and auditing requirements under the EU Taxonomy. As the world shifts toward a low-carbon economy, we aim to become your partner and ensure your business is not only compliant but thrives in the evolving landscape of sustainable growth.  

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