Written by a human
What is greenwashing?
Greenwashing is the process of misleading consumers into believing that a company’s practices are more environmentally friendly than they really are.
A few years ago, the European Commission decided to crack down on greenwashing by introducing the Green Taxonomy, which aimed to hold companies accountable and guide investors who value sustainability during their decision-making process.
Diving into the details of the EU Taxonomy Regulation
The who, what, and why of the European Union taxonomy regulation
What is the EU Taxonomy?
The European Union (EU) Taxonomy is a framework that classifies “sustainable activities” into investment categories based on their environmental impacts. This aids investors in making informed financial decisions by offering them a set of tools that enable easy comparison between various “green” investment choices.
Beyond making informed financial decisions, this framework helps asset managers analyze a financial product objectively.
The Taxonomy sets limitations around the language that can be used to describe investments – particularly in regard to sustainability and ESG concepts. This aims to prevent greenwashing, as companies can't claim to value environmental sustainability if they can't back it up through the framework.Why was this regulation introduced?
The Taxonomy was introduced to encourage investments into projects that will help the EU commission reach its climate goals under the European Green Deal, which also includes the Sustainable Finance Disclosure Regulation. Passed in 2019, the European Green Deal was established to assist in reaching climate neutrality by achieving net zero in greenhouse gas emissions added to the environment.
Many of the goals within this deal have markers in 2030 to measure progress, with some targets extending as far as 2050. In order to reach them, companies must initiate reliable projects, technologies, and activities that align with the targets.
Taxonomy alignment accelerates progress towards these goals by helping investors to identify the most environmentally focused investments and scales up the financing of them.
It’s important to note that opportunities for comparison within the Taxonomy don’t comment on the potential financial returns of any investment. Instead, the rules focus solely on the environmental impacts of each project. Alongside the Taxonomy, the EU has implemented additional legislation to enhance sustainable finance and reporting, such as with the Corporate Sustainability Reporting Directive.
Who should take notice of this EU green regulation?
Any investor can use the EU Taxonomy to compare the ESG side of financial investment opportunities.
In relation to EU member state companies that make environmental disclosures, there are three major categories that must comply:
- All companies with more than 500 employees that are already subject to the non–financial reporting directive (NFRD)
- Large companies that are not subject to the NFRD but do meet two out of three in the following criteria:
- 250 employees or more
- A balance sheet of €25 million or more
- A net turnover of €50 million or more
3. Listed small and medium sized enterprises
Companies that fall within these categories must comply, though even companies who are not obligated to comply may find that they win more contracts by adhering to these rules.
The rules of the EU Taxonomy Regulation
Companies must self-evaluate against sustainability rules to verify their progress before they can start advertising claims of sustainability. As they say, “it ain’t easy being green!”
What counts as a sustainable investment?
An investment is deemed as “sustainable” when it meets the following criteria:
- Contributes substantially to any of the categories above
- Doesn’t significantly harm any of the other environmental objectives
- Meets a minimum standard of social safeguards
- Complies with the technical screening criteria
Technical screening criteria (TSC)
The technical screening criteria helps establish conditions for meeting the six environmental categories that count under the EU’s definition of “green finance”. They are as follows:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition towards a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
These conditions oblige managers to provide a rationale behind the “enviro-friendliness” of their business and how they meet performance thresholds, such as reducing greenhouse gases while also contributing to a circular economy.
Disclosures
The reporting requirements of the EU Taxonomy is perhaps the most important, since it’s these public contributions to sustainability that impact investment choices the most. Regulated companies are required to report:
- The percentage of total turnover derived from products or services that align with the taxonomy
- The percentage of capital expenditure or operating expenses relating to products or services aligned with the taxonomy
As of 2022, only the first two of the six objectives were due to be reported on, while the other objectives were phased in during 2023.
Preventing greenwashing through compliance
The EU has ramped up its greenwashing reports in recent years in an effort to stamp down on the practice, so it’s fair to say that companies falling under this regulation will feel like they’re under the microscope.
It’s important to consider the full scope of your products, and to screen each one under EU Taxonomy criteria. After gaining an understanding of compliance weaknesses, plotting out next steps will be key. This means closing data gaps and defining responsibilities so that nothing falls through the cracks.
Taking unfounded claims around sustainability goes directly against this regulation, so all communications must be carefully crafted and reviewed to ensure compliance.
In addition to providing firms with a suite of compliant communication solutions, Global Relay prioritizes environmental protection and sustainability by maintaining green data centers. Book a demo to learn more.