The Taxonomy Regulation, which entered into force on 12 July 2020, is an EU-wide classification system for environmentally sustainable economic activities. The taxonomy will lay the foundations for all other measures on sustainable finance and help define what can be labelled as a sustainable investment in the EU.

It is designed to act as tool to help investors, companies, issuers and project promoters navigate the transition to a low-carbon, resilient and resource-efficient economy. The Taxonomy sets performance thresholds (referred to as ‘technical screening criteria’) for economic activities which:

• make a substantive contribution to one of six environmental objectives (see below);
• do no significant harm (DNSH) to the other five, where relevant;
• meet minimum safeguards (e.g., OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights).
• comply with technical screening criteria established by the European Commission through delegated acts

The Taxonomy Regulation establishes six environmental objectives

1. Climate change mitigation
2. Climate change adaptation
3. The sustainable use and protection of water and marine resources
4. The transition to a circular economy
5. Pollution prevention and control
6. The protection and restoration of biodiversity and ecosystems

Why was the Taxonomy developed?

In order to achieve the goals of the European Green Deal a common language and a clear definition of what is ‘sustainable’ is needed in order to direct investments towards sustainable projects and activities.

How does it work?

The Taxonomy Regulation tasks the European Commission with establishing technical screening criteria specific to each of the 6 environmental objectives through delegated acts.

The first delegated act under the EU Taxonomy on climate objectives was published on 21 April 2021 and sets criteria for economic activities in the sectors that are most relevant for achieving climate neutrality and delivering on climate change adaptation. This covers 9 sectors: energy, forestry, manufacturing, environmental protection and restoration activities, water supply, construction, IT, professional scientific and technical activities, transport, and buildings. The Delegated Act will come into effect from 1 January 2022.

For the climate change adaptation objective, additional sectors to those listed above have also been included such as financial and insurance activities, education, human health and social work activities as well as arts, entertainment and recreation.

Criteria for other environmental goals will follow in a later delegated act, in line with the mandates in the Taxonomy Regulation.

How does this impact companies and their Human Rights and Environmental Due Diligence (HREDD)?

In the case of HREDD, there are clear links to the EU’s trade & development agenda and sustainability taxonomy. Investors can choose to use the EU Taxonomy criteria in their due diligence for screening and identifying sustainable investment opportunities aiming to achieve a positive environmental impact. Companies can use the criteria of the EU Taxonomy as an input to their environmental and sustainability transition strategies and plans. Companies can choose to meet the criteria of the EU Taxonomy with the aim of attracting investors interested in green opportunities.

Article 3(c) of the Taxonomy Regulation requires an economic activity to comply with minimum safeguards in Article 18. Article 18 specifies that the minimum safeguards:

“shall be procedures implemented by an undertaking that is carrying out an economic activity to ensure the alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including” the core international human rights treaties and International Labour Organisation instruments referred to in the OECD Guidelines and the UNGPs.

Under the OECD Guidelines, companies are required to establish human rights due diligence processes to identify, prevent, mitigate and account for how they address their adverse human rights impacts, and integrate the results of such assessments into their operations. The UNGPs state:

“Business enterprises should carry out human rights due diligence. The process should include assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking responses, and communicating how impacts are addressed.”

The EU Taxonomy Regulation’s embedding of HRDD processes as ‘minimum safeguards’ also points to the EU Commission’s plans for mandatory human rights and environmental due diligence legislation in 2021.

How can Ardea help?

We harness our legal expertise to provide commercial solutions for organisations. Drawing on our combined experience of environmental law and human rights law, we can help organisations to develop their human rights and environmental due diligence frameworks.

We also have a range of free and paid resources on our website and we hope that you will enjoy browsing!

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