EU Taxonomy is playing an increasingly important role in sustainability reporting. But what exactly is it, what does it mean for your organization and how do you apply it? In this article we give you a clear overview and practical tools. This article is a summary of the Practice Note we created for Sdu. For more information and all our other Practice Notes and CSRD Tools, visit: https://www.sdu.nl/shop/jes-knowledge.html.
What is the EU taxonomy?
The EU Taxonomy is a classification system for sustainable economic activities applied within the new European Corporate Sustainability Reporting Directive(CSRD). This system was developed to meet European climate goals: according to the Paris Agreement, the EU must be climate neutral by 2050.
The classification system has three main purposes:
- Countering greenwashing: Providing clear, standardized definitions of what is environmentally sustainable prevents activities from being falsely labeled as “green.
- Redirecting capital flows: By clarifying which investments are sustainable, capital flows can be directed toward activities that contribute to a sustainable economy.
- Supporting the green transition: Companies are given concrete tools to make their operations more sustainable, aimed at protecting ecosystems, reducing climate change and the transition to a circular economy, among other things
Whereas the EU Taxonomy provides the classification framework for sustainable activities, the CSRD regulates sustainability reporting. Together, therefore, they provide a powerful tool to help organizations and investors assess and guide their sustainability performance.
Roadmap: Applying EU Taxonomy in your organization
Step 1. Map your sustainable activities
The first step is to determine which of your business activities may be covered by the EU Taxonomy. This seems simple, but requires a systematic approach:
- Check the EU Taxonomy Compass: This is an EU online tool that allows you to search for relevant taxonomy criteria by sector or activity. Note that the list of activities is dynamic and is regularly updated and expanded.
- Use NACE codes as a starting point: A practical approach is to start with your company’s NACE codes. These are the standard European codes for business activities. Note, however, that taxonomy descriptions do not always correspond one-to-one with NACE codes.
- Note different types of activities: The taxonomy distinguishes
- Primary activities that directly contribute to sustainability
- ‘Transitional’ activities that support the transition to a sustainable economy
- ‘Enabling’ activities that help other companies become more sustainable
- Look beyond the main activity: Support activities may also qualify. Consider, for example, energy management or sustainable property management.
Case study: A construction company
Take a construction company that both constructs new buildings and renovates existing ones. According to section 7.2 of the Technical Criteria, the renovation of buildings is covered by the EU Taxonomy. This is a concrete example of a qualifying activity. But there are many more possibilities: from installing solar energy systems and battery storage to implementing smart energy management systems.
Step 2. Assess your contribution to environmental goals
After identifying your activities, the next step is to determine your environmental impact. An activity must make a significant positive contribution to at least one of the EU’s six environmental objectives:
The six environmental objectives are:
- Climate Mitigation: Reducing greenhouse gas emissions, for example through energy efficiency, renewable energy and electric transportation.
- Climate adaptation: Reducing vulnerability to climate change, such as through improved water management, heat-resistant buildings and climate-resistant infrastructure.
- Water and marine resources: the protection of water (bodies) and marine ecosystems, including through water treatment, sustainable water management and protection of water quality.
- Circular Economy: The efficient use of materials and resources, including recycling, waste prevention and reuse of materials.
- Pollution Prevention: The reduction of harmful emissions to air, water and soil. This requires activities to comply with Best Available Techniques (BAT).
- Biodiversity and ecosystems: The protection and restoration of natural systems, such as through conservation, sustainable agriculture and ecosystem restoration.
Note: For CSRD reporting, climate mitigation and adaptation have been combined into one theme, resulting in five environmental themes in total.
Case study: Vacation Park
A resort that wants to be classified as sustainable under the taxonomy must include:
- Demonstrated contribution to biodiversity conservation or restoration
- Have a concrete action plan for conservation
- Be able to quantify impact with measurable results
To determine if your activity contributes significantly, use:
- Sector-specific criteria from the EU Taxonomy Compass
- Science-based thresholds
- Measurable indicators of impact
Tip: Start with the environmental goal you can make the biggest impact on. Not every activity has to contribute to all goals – one significant contribution is enough, as long as you don’t significantly harm the other goals.
Step 3. Apply best available techniques.
To be classified as sustainable, you must use Best Available Techniques (BAT). This means that you use the most effective available techniques to minimize environmental impact. In doing so, you look at three aspects:
- How engineering is designed, maintained and eventually decommissioned
- Effectiveness for environmental protection and achieving results
- The practical and economic feasibility on a large scale
Case study: A vacation park becomes sustainable
- Gray water recycling for shower water reuse
- Heat pumps with good insulation for energy efficiency
- Electric golf carts and charging stations
- Native plantings and green roofs
- Organic swimming pond instead of chemical pool
Step 4: Prevent harm to other environmental goals
The Do No Significant Harm (DNSH) principle recognizes that business activities will always have some impact on the environment, but sets clear limits. An activity that contributes to one environmental goal must not significantly harm the other goals. In practice, this means using an Environmental Impact Assessment (EIA) to identify your impact and take measures to mitigate negative impacts. This is especially important for activities in sensitive areas.
Practice DNSH requirements:
- Buildings at least energy label C
- New construction (after 2020) nearly climate neutral
- Separate waste collection
- Plan against food waste
Step 5. Comply with OECD and UN guidelines.
Sustainability is not limited to environmental aspects. The EU Taxonomy also requires that you comply with international social standards. Specifically, this means that your business operations must be in line with the OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights, and the fundamental labor rights set forth in the ILO Principles.
Examples of how to implement this
- Develop policies for labor and governance
- Establish a management system for working conditions
- Monitor KPIs such as safety, diversity and equal pay
- Conduct regular audits, including of suppliers
Getting started with the EU Taxonomy
Implementing EU Taxonomy in your organization can seem complex, but with the right approach, it is doable. In any case, we recommend the following:
- Start preparing on time (preferably today rather than tomorrow)
- Ensure proper documentation of all steps
- Involve all stakeholders in the process
- Use available tools and guidelines
- Seek timely external expertise as needed
Want to learn more about the EU Taxonomy and what it means specifically for your organization? Then get in touch with us. Want to know more about Empact? Then read our story!