The role of a green taxonomy in classifying sustainable economic activities

Many solutions already exist or are being developed to address the climate crisis. Today’s challenge is to channel financial flows towards those solutions, identifying the activities that contribute “substantially” to addressing the roots or the impacts of climate change. Therefore, investors need to identify the activities that are aligned with the 2050 net-zero decarbonization targets as defined by science, and governments need to ensure the movement of capital towards those activities is free from barriers. It is also becoming more evident that the climate crisis cannot be considered in a silo. Investors and governments need to develop integrated investment strategies, not only focusing on solutions that contribute to climate mitigation and adaptation strategies, but also those that serve other environmental (and potentially social) objectives—while avoiding negative impact to any of these objectives.

Green taxonomies are a key pillar to achieve those objectives as they list economic activities that can be considered as environmentally sustainable investments based on a set of specific criteria. However, having a set of criteria enshrined in law does not automatically lead to achieving the specific environmental objectives (e.g., the temperature goals defined in the Paris Agreement). Informed investment decisions require transparency in terms of the extent to which current economic activities and investments meet the criteria.

Therefore, green taxonomies have been created at various levels to support the development of credible financial instruments together with harmonized rules on transparent disclosures.

There are three main benefits of a green taxonomy:

• Providing clarity to the standard and criteria according to which an economic activity contributes to pre-set environmental objectives (such as climate change mitigation and adaptation, or pollution prevention and control, among others)
• Bestowing certainty to investors in terms of development and reporting requirements for new financial products (such as green bonds, green debt, and green equity portfolios)
• Diminishing the risks associated with greenwashing, where an unfair competitive advantage can be gained by marketing a financial product as “sustainable” or “green” without it meeting science-based environmental standards

How companies can implement and operationalize green taxonomies

Under the EU Taxonomy for sustainable activities, around 11,700 large entities fall under the mandatory reporting requirement. The recently published proposal for the Corporate Sustainability Reporting Directive (CSRD) aims to cover the entire EU economy by enlarging the scope of companies that will need to publish sustainability information to all listed and non-listed companies (with the exception of micro companies).

Approximately 49,000 entities will fall under these new non-financial reporting requirements. Understanding the requirements—and benefiting from the added value of the EU Taxonomy—will be a major challenge for most of those organizations.

To support organizations impacted by the EU Taxonomy in navigating those challenges and opportunities, we developed the “EU Taxonomy User Guide” for the European Commission. The guide is designed as a practical reference and includes a detailed four-step approach for companies and financial institutions willing to assess and report on the alignment of their activities with the EU Taxonomy.