Taxonomy regulation is the term used to describe the framework put in place by governments to categorise economic activities in accordance with how environmentally sustainable they are. The main goal is to develop a uniform methodology for designating environmentally responsible investments and easing the shift to a low-carbon economy. With the creation of the EU Taxonomy Regulation serving as a notable example, the European Union (EU) has played a key role in developing taxonomy regulation.
In 2020, the EU's Sustainable Finance Action Plan included the official adoption of the EU Taxonomy Regulation. Setting specific requirements for sustainable economic actions aims to tackle "greenwashing" by providing investors with the information they need to make decisions about environmentally responsible investments.
Below are the summed-up fundamental details of the regulation:
1. Purpose and Scope
The EU Taxonomy Regulation seeks to establish a unified classification system for environmentally sustainable activities, with a focus on six key environmental objectives:
- shift to a circular economy
- climate change adaptation
- climate change mitigation
- sustainable usage and protection of water and marine resources
- pollution prevention and control
- protection and restoration of biodiversity and ecosystems.
2. Technical Screening Requirements
The regulation indicates specific technical screening requirements for each of the environmental objectives. These standards define the requirements that economic activities must satisfy to be considered environmentally sustainable. For instance, in order for an economic activity to be considered a sustainable activity, it must significantly advance one or more environmental goals while posing minimal risk to others.
3. Disclosure Requirements
Under the EU Taxonomy Regulation, businesses and financial institutions are required to disclose the extent to which their economic operations adhere to the taxonomy's eligibility requirements. Investors need this disclosure to assess their investments' environmental impact properly.
4. Implementation Timeline in phases
The regulation is being implemented in phases. Initially, the focus was on climate change mitigation and adaptation activities, with other environmental objectives to be integrated later.
5. Green Bond Standard
The EU Taxonomy Regulation will be the legal framework to define what constitutes a "green" bond while promoting transparency and trustworthiness in the green bond market.
The regulation is expected to have a profound impact on financial markets within the EU and beyond.
Investors will be encouraged to shift their portfolios towards sustainable investments, and businesses will strive to meet the taxonomy's criteria to attract green investments. Implementing the taxonomy regulation faces challenges, such as defining criteria for activities with varying degrees of environmental impact and ensuring consistency in the classification process across industries and member states. While the EU is taking the lead, other countries and regions are also considering similar taxonomy frameworks. Harmonizing these efforts on a global scale could streamline sustainable investments and create a more cohesive approach to combating climate change.
With the support of our global network (6th largest in the world), the team of RSM Cyprus stands ready to discuss and support Companies to navigate through the challenges associated with this reporting.
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