The European Union (EU) Taxonomy is a framework designed to help businesses and investors identify environmentally sustainable economic activities, in other words, answer the question - which economic activities can be considered environmentally sustainable? It is part of the EU's efforts to transition to a more sustainable economy. The EU Taxonomy was finalized in June 2020. It is a living document and will be updated regularly as new scientific evidence becomes available. The taxonomy is a complex system with several components:
A list of economic activities that can be considered environmentally sustainable (the "taxonomy")
Criteria for determining whether an activity is environmentally sustainable
A guidance for companies and investors on how to use the taxonomy.
<aside> 💡 Investors and financial institutions will need to use the EU Taxonomy when selling financial products that are marketed as environmentally sustainable. For example, if a bank offers a "green bond" to investors, it will need to ensure that the economic activities it funds meet the criteria laid out in the EU Taxonomy. Failure to comply with the rules could result in financial penalties.
</aside>
Companies can use the EU Taxonomy to assess their own environmental performance. By understanding the criteria laid out in the taxonomy, businesses can better identify areas where they need to improve their environmental impact. Companies can also use the taxonomy to identify opportunities to invest in environmentally sustainable economic activities.
The EU Taxonomy is designed to be a global standard for sustainable finance. Companies outside of Europe that want to sell financial products in Europe will need to comply with the rules laid out in the EU Taxonomy. Additionally, companies outside of Europe may find that investors are increasingly demanding that they disclose their environmental impact and demonstrate that they are taking steps to reduce their carbon footprint.
For more information about the EU Taxonomy, please visit the following links:
<aside> 💡 At present, there is no equivalent to the EU Taxonomy in the US. However, there are efforts to create a framework similar to the EU Taxonomy in the US, such as the Green New Deal proposed by some US politicians. The US Securities and Exchange Commission (SEC) has also taken steps to increase ESG (Environmental, Social, and Governance) disclosures by public companies in the US.
</aside>