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On 22 June 2020, the Taxonomy Regulation was published in the Official Journal of the European Union following adoption by the European Parliament, which means the Taxonomy Regulation will enter into force on 12 July 2020. The Taxonomy Regulation is designed to establish an EU-wide classification framework to enable financial market participants (FMPs) to identify which economic activities and investments can be treated as ‘environmentally sustainable’.

This latest development forms part of the EU’s action plan to support and direct private capital towards investing in sustainable products, to support the EU’s efforts to be carbon neutral by 2050.

The Taxonomy Regulation

The Taxonomy Regulation sets out the criteria to be considered when determining the degree to which an economic activity or product qualifies as ‘environmentally sustainable’.

An economic activity can be deemed environmentally sustainable if it:

1. makes a substantial contribution to at least one of the six environmental objectives in the Taxonomy Regulation (see below) or directly enables other activities to make a substantial contribution to one or more of those objectives;

2. does not significantly harm any of the environmental objectives;

3. is carried out in compliance with set minimum safeguards (being procedures implemented by the undertaking that is carrying out the economic activity to ensure alignment with international guidelines, including the UN’s Guiding Principles on Business and Human Rights); and

4. complies with technical screening criteria (to be established by the European Commission in due course via delegated acts), which will provide conditions under which a specific economic activity qualifies as contributing ‘significantly,’ or causing ‘significant harm’, to environmental objectives.

The environmental objectives in the Taxonomy Regulation are:

a. climate change mitigation (this means holding the increase in the global average temperature to under 2°C and pursuing efforts to limit it to 1.5°C above pre-industrial levels);

b. climate change adaptation (this is the adjustment to actual and expected climate change and its impacts);

c. the sustainable use and protection of water and marine resources;

d. the transition to a circular economy (this is an economic system whereby the value of products, materials and other resources in the economy is maintained for as long as possible);

e. pollution prevention and control; and

f. protection and restoration of biodiversity and ecosystems (biodiversity being variability among living organisms, and ecosystems meaning dynamic complexes of plant, animal and micro-organism communities and their non-living environment, which interact as a functional unit).