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Sustainable Investing Glossary

EU Taxonomy

The EU Taxonomy is a strategy to create a harmonized understanding of what actually consitutes sustainable activities across the European Union. It attempts to define ‘green activities’ for the first time, using minimum criteria that economic activities should comply with in order to be considered to be environmentally sustainable.

As such, it forms a key component of the Sustainable Finance Action Plan, which aims to promote sustainable investment across the 27-nation bloc, and the Sustainable Finance Disclosure Regulation, which aims to make the sustainability profile of funds more comparable and better understood by end-investors.

The taxonomy states that only activities which substantially contribute to one or more of six environmental objectives should be defined as being green. These are climate change mitigation; climate change adaption; protecting marine and water resources; transitioning to a circular economy; preventing pollution; and protecting or restoring biodiversity and ecosystems.

Creating returns that benefit the world we live in
Creating returns that benefit the world we live in
Sustainable investing

Only those activities contributing to the first two environmental objectives – climate change mitigation and adaptation – have so far been defined. The first disclosures on these objectives will need to be made by January 2022. The activities deemed to contribute to the remaining four objectives are expected to become clear in 2021, with disclosures to be made as of 2023.

To meet the taxonomy, asset managers will have to disclose the percentage of their funds’ assets under management that sit within taxonomy-aligned activities. Calculating this will require a deep level of granularity into what proportion of a company’s activities are aligned; an energy company, for example, may have an oil business which is not aligned and a solar power business which is. The overal proprotions of revenue derived from each activity need to be calculated to assess how well aligned the whole portfolio is with the taxonomy.

See also: EU Sustainable Finance Action Plan, EU Sustainable Finance Disclosure Regulation, Paris Agreement, European Green Deal.

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