More generally, according to the EU, "sustainable finance" refers to the process of integrating environmental, social and governance (ESG) issues into investment decisions in the financial sector, leading to more long-term investment in sustainable economic activities and projects (Source). This means that the EU is also following the so-called ESG structure in formulating the requirements under the Action Plan on Financing Sustainable. Sustainability is assessed on the basis of three dimensions.
The EU taxonomy: a classification system for environmentally sustainable economic activities
With the EU taxonomy, the European Union has developed an economic activity classification system that also relates to the E, S and G aspects of sustainability, also defining technical requirements for each aspect. Since only minimum requirements have been defined for the social (S) and governance (G) dimensions, the EU taxonomy is often referred to as the ‘environmental taxonomy’.
The following six environmental objectives provide the substantive basis for the EU taxonomy:
- Climate Change Mitigation
- Climate Change Adaptation
- Sustainable Use and Protection of Water and Marine Resources
- Transition to a Circular Economy
- Pollution Prevention and Control
- Protection and Restoration of Biodiversity and Ecosystems
To be considered environmentally sustainable under the taxonomy system, economic activities must make a substantial contribution to one of these six environmental objectives. At the same time, they must not have significant adverse effects on the other five environmental goals. In the system, this is called the "do no significant harm" (DNSH) principle. Technical evaluation criteria are developed for all six environmental objectives, which can be used to assess the specific activities in terms of their environmental sustainability.
With the economic activities covered by the taxonomy, priority was given to sectors responsible for 93.5 percent of all direct greenhouse gas emissions in the EU. Evaluation criteria have already been defined for these activities in order to make a significant contribution to the environmental goals of "Climate Change Mitigation", "Climate Change Adaptation" and "Transition to a circular economy". The respective DNSH evaluation criteria for the other environmental objectives were also established. The rule is that the entire set of requirements must be met in order for the economic activity to be classified as taxonomy-aligned. In June 2023, the final screening criteria for the remaining four environmental objectives were published.
Note: due to the variety of ESG rating providers – and the different scales, metrics, system boundaries and scopes they apply – caution should be exercised when drawing comparisons with the regulatory definition.
The DGNB has developed comparison guidelines on the 'buildings' framework in the context of EU taxonomy applied to the construction of new buildings.
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