In the world of sustainable finance, the EU Taxonomy has emerged as a ground-breaking regulatory framework. Its purpose is to classify economic activities based on their environmental sustainability, providing clear guidelines for companies.
This guide explores:
- What is the EU Taxonomy?
- Who does it apply to?
- Who does EU Taxonomy impact on in the Aviation sector?
- How are sustainable economic activities defined within the EU Taxonomy?
- How do you align with the Taxonomy’s environmental objectives?
- What are the EU Taxonomy Reporting Requirements?
The impact of the EU Taxonomy on the aviation sector is significant, as it plays a pivotal role in measuring ESG performance and promoting sustainability. The Taxonomy guides investments towards environmentally sustainable activities, encouraging the adoption of fuel-efficient aircraft, emission reduction strategies, and transparent reporting of the Green Asset Ratio (GAR). By aligning with the Taxonomy’s objectives, aviation stakeholders contribute to Europe’s Green Deal goals, fostering a greener and more sustainable aviation industry. This standardized approach enables transparent reporting and facilitates comparisons of ESG performance, driving the sector towards a more responsible and environmentally conscious future.
What is the EU Taxonomy?
The EU Taxonomy serves as a classification framework designed by the European Union to ascertain whether an economic activity is environmentally sustainable or not. It serves as a crucial tool, guiding investors, companies, and policymakers in directing investments toward activities that contribute to a sustainable and low-carbon economy.
The EU Taxonomy framework is underpinned by six environmental objectives which include:
- Climate Change Mitigation: Activities that actively contribute to reducing greenhouse gas emissions and combating climate change.
- Climate Change Adaptation: Activities that aid in adapting societies and ecosystems to the impacts of climate change.
- Sustainable Use and Protection of Water and Marine Resources: Activities that promote the sustainable management and safeguarding of water and marine resources.
- Transition to a Circular Economy: Activities that facilitate the shift from a linear economic model to a circular one, emphasizing resource efficiency and waste reduction.
- Pollution Prevention and Control: Activities aimed at preventing and reducing pollution, thereby improving the quality of air, water, and soil.
- Protection and Restoration of Biodiversity and Ecosystems: Activities that contribute to the preservation, restoration, and sustainable management of biodiversity and ecosystems
The EU Taxonomy framework employs Technical Screening Criteria (TSC) for each sector to ensure that economic activities asserting their sustainability align with specific environmental objectives and significantly contribute to those aims. The TSC achieves this by explicitly establishing quantitative and qualitative thresholds or conditions that an activity must satisfy in order to assert substantial contribution to the environmental objectives.
EU Taxonomy classifications
Under EU taxonomy activities can be categorized into:
- Green activities: Economic activities that substantially contribute to one or more of the six environmental objectives defined in the EU Taxonomy Regulation. For instance, adopting technologies that reduce carbon emissions and promote climate change mitigation in aviation operations.
- Transitional activities: Economic activities that do not have a low-carbon alternative but are still considered to contribute to the environmental objectives of the Taxonomy. Transitional activities are associated with the climate change mitigation objective and are necessary for the transition to a low-carbon economy.
- Enabling activities: Economic activities that enable other economic activities to make a substantial contribution to one or more of the six environmental objectives defined in the EU Taxonomy Regulation. This includes investing in technologies that improve fuel efficiency, reduce greenhouse gas emissions, and enhance resource efficiency in the aviation sector. In the aviation industry, transitional activities aim to promote fleet renewal with fuel-efficient aircraft and encouraging the adoption of best-in-class and eco-friendly aviation technologies.
- Excluded activities: Economic activities that make a significant contribution to one or more of the six environmental objectives defined in the EU Taxonomy Regulation but also cause significant harm to other environmental objectives or do not meet minimum social safeguards.
Designed by the European Union, this classification framework, which is underpinned by six environmental objectives and clear TSC, will distinguish between environmentally sustainable and unsustainable economic activities. Guiding the way for investors, companies, and policymakers towards a sustainable and low-carbon economy. In the aviation sector, it will encourage fleet renewal through the adoption of top-tier, fuel-efficient aircraft and to incentivize the use of Sustainable Aviation Fuels (SAF).
Who does EU taxonomy apply to?
The EU Taxonomy applies to a wide range of entities operating in the European Union, including both financial and non-financial companies.
Specifically, it applies to:
- Financial Institutions: This includes banks, insurance companies, asset managers, pension funds, and other financial intermediaries that provide investment and financing services regardless of their size.
- Non-Financial Companies: The EU Taxonomy also extends its scope to non-financial companies, including listed companies and large undertakings operating in the EU.
- Specific Sectors: The EU Taxonomy targets various economic sectors and industries, aiming to classify their activities based on their environmental sustainability. This includes sectors like aviation, energy, manufacturing, agriculture, and more.
The EU Taxonomy seeks to create a common language and standardized approach for identifying and reporting on environmentally sustainable economic activities across different sectors and entities. By applying to a wide range of stakeholders, it plays a critical role in promoting sustainable finance and facilitating the transition to a greener economy in the European Union.
Who does EU Taxonomy impact on in the Aviation sector?
The EU Taxonomy applies to various aviation stakeholders, including:
- Airlines: Commercial airlines operating in the European Union are subject to the EU Taxonomy regulations.
- Airports: Airport operators and authorities within the European Union are also covered by the EU Taxonomy.
- Aircraft Manufacturers: Companies involved in manufacturing aircraft within the European Union fall under the scope of the EU Taxonomy.
- Aircraft Lessors: Entities engaged in aircraft leasing and financing activities in the European Union are subject to the EU Taxonomy.
- Financial Institutions: Banks, asset managers, insurance companies, pension funds, and other financial intermediaries operating in the European Union are obliged to comply with the EU Taxonomy regulations when making investments or providing the finance for transactions in the aviation sector.
- Other Aviation-Related Businesses: Various associated businesses within the aviation industry, such as suppliers, ground handling services, and maintenance companies, are also affected by the EU Taxonomy when conducting activities that align with its objectives.
The Taxonomy aims to guide aviation investment toward sustainable activities, prevent greenwashing and will encourage the adoption of sustainable technologies.
When does EU taxonomy apply?
Companies and financial institutions are obligated to comply with the EU Taxonomy and disclose the proportion of environmentally sustainable economic activities in their business, investments, or lending activities based on article 8 of the EU Taxonomy. The disclosure requirements for financial and non-financial entities are specified in a Delegated Act adopted on 6 July 2021 by the Commissions, for scrutiny by the co-legislators.
Here are the key dates for the EU Taxonomy:
- 12 July 2020: The EU Taxonomy Regulation entered into force, establishing the basis for the EU Taxonomy by setting out four overarching conditions that an economic activity has to meet to qualify as environmentally sustainable.
- January 2022: The mandatory application date for the climate change mitigation objective, which includes aviation activities.
- January 2023: The mandatory application date for the other five environmental objectives, including sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
- March 2023: The EU Taxonomy draft document stipulates that by 2030, aircraft in use must use a “minimum share of sustainable aviation fuels (SAF), corresponding to 10%”. This requirement aligns with the EU’s efforts to promote the use of sustainable alternatives to traditional aviation fuels, reducing the sector’s carbon footprint.
- 5 April 2023: The European Commission publishes the draft amendment to Delegated Act EU 2021/ 2139, including draft technical screening criteria in Annex 1 (the Draft Delegated Act). This marks the inclusion of aviation as a transitional activity within the EU Taxonomy Regulation.
- 13 June 2023: Following a consultation period, the draft amendment is updated and published as part of the European Commission’s sustainable finance framework.
- 2023-2024: The second mandate of the Platform on Sustainable Finance takes place, providing a forum for discussions and recommendations on sustainable finance.
The March 2023 mandate mirrors the industry’s increasing dedication to mitigating its carbon footprint and aligns seamlessly with the broader EU objectives for sustainable alternatives in aviation.
How are sustainable economic activities defined within the EU Taxonomy?
The Taxonomy Regulation defines sustainable economic activities based on the following conditions:
- Activities must contribute to at least one of the six environmental objectives listed in the Taxonomy.
- Technical Screening Criteria (TSC): are used to determine if an economic activity significantly contributes to the above objectives. The use of TSCs ensure that the classification of activities as sustainable is based on objective and verifiable standards. TSCs have been developed for each of the six environmental objectives, using rigorous process grounded in scientific evidence and informed by input from experts and stakeholders.
- Do No Significant Harm (DNSH): Activities should not cause significant harm to any of the other objectives, while also upholding basic human rights and labour standards.
How do you align with the Taxonomy’s environmental objectives?
You can assess your EU Taxonomy alignment by following these steps:
- Identify the Relevant Activities: Financial institutions need to identify the economic activities in their portfolio or operations that fall within the scope of the EU Taxonomy. This involves determining which activities contribute to or are linked to the six environmental objectives outlined by the Taxonomy.
- Evaluate Eligibility: Once the relevant activities are identified, financial institutions assess their eligibility based on the technical screening criteria (TSC) established by the EU Taxonomy. The TSC provides specific thresholds and requirements that activities must meet to be considered environmentally sustainable.
- Measure Alignment: Financial institutions then measure the alignment of their activities with the Taxonomy’s environmental objectives. This involves evaluating how well each activity contributes to the objectives and whether it avoids significant harm to other environmental areas. It may require considering factors such as carbon emissions, resource efficiency, waste management, pollution prevention, biodiversity conservation, and water and marine resource protection.
- Quantify and Analyse: To quantify alignment, financial institutions can assign a score or rating to each activity based on its level of compliance with the Taxonomy’s criteria. This may involve using standardized metrics, indicators, or scoring methodologies. The institution can then analyse the overall alignment of its portfolio or operations by aggregating the scores of individual activities.
- Report and Disclose: Financial institutions are required to report on their alignment with the Taxonomy’s environmental objectives. They disclose relevant information in their reports, sustainability disclosures, and other public communications. The reporting should provide transparency and enable stakeholders to assess the institution’s environmental performance and progress towards sustainable objectives.
- Monitor and Improve: Financial institutions should establish monitoring mechanisms to track their alignment over time. This involves regular reviews, updates, and assessments of their activities’ alignment with the Taxonomy. By monitoring performance and identifying areas for improvement, institutions can refine their strategies, enhance their alignment, and contribute to a more sustainable economy.
What are the EU Taxonomy Reporting Requirements?
The EU Taxonomy reporting requirements, involves disclosing the alignment of certain key performance indicators (KPIs) with the Taxonomy.
Specifically, the reporting requirements include:
- Turnover: Companies need to report the proportion of their turnover that is Taxonomy-aligned. This involves disclosing the percentage of revenue generated from activities that meet the criteria of the EU Taxonomy.
- Capital Expenditure (CapEx): Companies are required to report the alignment of their CapEx with the EU Taxonomy. This entails disclosing the extent to which investments in long-term assets, such as infrastructure or equipment, are directed towards Taxonomy-aligned activities.
- Operational Expenditure (OpEx): Companies must report the alignment of their OpEx with the EU Taxonomy. This involves disclosing the extent to which day-to-day expenses, such as operating costs, are incurred in support of Taxonomy-aligned activities.
The reporting on these KPIs, including Turnover, CapEx, and OpEx, is typically done in the annual reports. The specific reporting requirements and timelines may vary depending on the size and type of the company.
The taxonomy reporting requirements are supported by the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR), which ensure accurate disclosure of Taxonomy-eligibility and alignment.
The EU Taxonomy has emerged as a ground-breaking regulatory framework in the world of sustainable finance. Designed to classify economic activities based on their environmental sustainability, it provides clear guidelines for companies and investors seeking to contribute to a more sustainable and low-carbon economy. In the aviation sector, the Taxonomy’s impact is pivotal in advancing sustainability efforts.
It mandates stakeholders, including airlines, airports, aircraft manufacturers, and lessors, to adopt fuel-efficient aircraft, emission reduction strategies, and transparent reporting of the Green Asset Ratio (GAR), aligning with Europe’s Green Deal objectives. By employing specific criteria and screening, aviation stakeholders can ensure transparent reporting, contributing to a greener and more responsible aviation industry.
As the EU Taxonomy continues to evolve and grow, its role in guiding sustainable investments and promoting environmental objectives remains essential for a sustainable future.