Finance Glossary
Taxonomy
What is taxonomy?
The taxonomy is a recommendation proposed by the expert group on sustainable finance and adopted in March 2018 by the European Commission in its strategy to develop a sustainable and carbon-neutral economy by 2050.
The objective of this strategy is to rethink the functioning of our financial system in order to make economic growth compatible with the preservation of the planet and its resources.
To achieve this, the Commission aims to redirect private capital towards more sustainable investments.
The taxonomy is a flagship measure of the sustainable finance regulatory action plan that allows for the definition of a common method for all market participants to identify "green" activities.
The taxonomy is a classification system for economic activities with environmental constraints.
It contains a list of concerned activities (energy production and use, transport, metallurgy) and the level of environmental performance they must achieve to limit global warming to less than two degrees.
What are the objectives of the taxonomy?
The taxonomy addresses six environmental objectives, which are:
- Climate change mitigation,
- Climate change adaptation,
- Sustainable use and protection of water and marine resources,
- Prevention and reduction of pollution,
- Transition to a circular economy, biodiversity, and recycling,
- Protection of ecosystems.
For an activity to be eligible, it must contribute to one of the six environmental objectives of the European Union without negatively impacting any of the other five. The taxonomy provides a common language for all financial actors in the European Union by identifying green activities and the expected level of environmental performance. Furthermore, it defines the "green" vision at the European level and will serve as a reference in regulation, notably regarding:
- Green bonds,
- The eco-label,
- Climate benchmark indices,
- Climate reporting.