EU Taxonomy | Definition of Environmental Targets
ESG in the financial sector

The EU taxonomy has been the talk of the town for some time. So far, two environmental objectives had already been defined in more detail, for which activities could be classified as taxonomy-eligible and -compliant. With the recently concluded consultation, the other four environmental goals are now also being defined in concrete terms. This provides the basis for determining the green asset ratio within the institutions. Learn more about environmental targets in our article on EU taxonomy.

Definition of the environmental goals

The EU taxonomy, more precisely Regulation EU/2020/852, establishes the basis for assessing the sustainability of economic activities, with a classification system allowing to classify whether the desired sustainability of the investment is given.

An essential aspect of the regulation is the classification of an economic activity as taxonomy-eligible, taxonomy-compliant or non-taxonomy-relevant. A distinction is made as to whether an economic activity can generally be assigned to one of the six environmental objectives of the Taxonomy Regulation (taxonomy-compliant) and this economic activity also fully complies with Article 3 of the Regulation (taxonomy-compliant), or whether economic activities cannot be assigned to any of the six environmental objectives (not taxonomy-relevant). On the one hand, Article 3 focuses on the six environmental goals, and on the other hand, it expands them to include criteria such as

• the economic activity makes a significant contribution to one or more environmental objectives;
• of significant impairment of environmental objectives, here it is required, among other things, that the economic activity does not negatively affect one of the stated environmental objectives;
• the minimum protection of human rights is guaranteed (among others, in accordance with the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights).

The first two environmental goals ‘climate protection’ and ‘adaptation to climate change’ have already been defined. For the four other environmental objectives, technical assessment and verification criteria were published by the EU as part of the consultation in order to specify when economic activities should be assigned to these environmental objectives. Reporting on the breakdown of goals three through six is already required for fiscal year 2023, so adoption of the legislation[1] is scheduled for the end of the second quarter, or early in the third quarter at the latest.

The environmental goals

The economic activities assigned to an environmental objective are used to determine whether an investment can be considered compliant with the EU taxonomy. Therefore, the concrete design is essential to determine newly created metrics, such as the Green Asset Ratio. It is therefore worth taking a closer look at the environmental targets below.

1. Environmental goal: Climate protection

Criteria for determining whether an economic activity makes a significant contribution to climate protection. The goal is to stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Economic activities include, but are not limited to:

• Generation, transmission, storage, distribution, or use of renewable energy: Through the use of innovative technologies with potential for significant future savings, or through necessary grid reinforcement or expansion, and increased energy efficiency;
• Strengthening rural carbin sinks: Including by preventing deforestation and forest degradation; restoring forests; sustainably managing and restoring cropland, green space, and wetlands; reforestation; and regenerative agriculture.

2. Environmental goal: Adaptation to climate change

Criteria for determining whether an economic activity makes a significant contribution to climate change adaptation. Economic activities include, but are not limited to:

• Adaptations in line with the climate goal: Either substantially reduce the risk of adverse effects of current and expected future climate on economic activity itself or substantially reduce the adverse effects on those;
• Measures: Avoid or reduce the risk of impacts of current and expected future climate on people and nature.

3. Environmental goal: Sustainable use and protection of water and marine resources

Criteria for determining whether an economic activity makes a significant contribution to the sustainable use and protection of water and marine resources. Economic activities include, but are not limited to:

• Water supply, wastewater disposal, waste management and remediation activities: Operation and renewal of water production, treatment and supply systems for human consumption based on the abstraction of natural water from surface or groundwater sources. The goal is to bring water quality into compliance with current legislation.
• Disaster risk management: Design, construction, expansion, and operation of large-scale, near-natural flood or drought management and wetland restoration activities that help prevent and protect against floods or droughts.

4. Environmental goal: Transition to a circular economy

• Criteria for determining whether an economic activity makes a significant contribution to the transition to a circular economy. The economic activities mentioned here include: Production of plastic packaging materials – production of packaging materials that ensure reuse within an open or closed economic cycle;
• Generation of alternative water resources: Alternative water resources, such as rainwater, are used to replace water from drinking water supply systems and can be used for groundwater recharge and irrigation.

5. Environmental goal: Prevention and reduction of environmental pollution

Criteria for determining whether an economic activity makes a significant contribution to pollution prevention and control. Economic activities listed in this context include:

• Production of pharmaceutical products and active ingredients: Manufacturing of pharmaceutical products including the operations of production, packaging and distribution of active ingredients and related controls;
• Hazardous waste treatment: Construction, conversion, modernization, and operation of dedicated hazardous waste treatment facilities, including incineration of non-recyclable hazardous waste.

6. Environmental Objective: Protection and restoration of biodiversity and ecosystems

Criteria for determining whether an economic activity makes a significant contribution to the protection and restoration of biodiversity and ecosystems. This includes the conservation, including restoration, of habitats, ecosystems, and species. Diverse conservation projects, as well as restoration projects, are designed to protect the maintenance or improvement of the condition and development of terrestrial, freshwater, and marine habitats, ecosystems, and populations of animal and plant species.

Regulatory scope and further outlook

The application of the EU taxonomy is already mandatory for large institutions. In the years to come, disclosure requirements will increase even further, as our following articles on the Non-Financial Reporting Directive, disclosure under Art. 449a CRR and the Corporate Sustainability Reporting Directive will show.