The EU taxonomy is setting the new gold standard for which economic activities can be considered sustainable. With the taxonomy comes a lot of new terms - but what do expressions like Enabling Activity and Substantial Contribution actually refer to? And what is the difference between being taxonomy eligible and taxonomy aligned? 

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The Celsia team explains some of the key terms to help you better understand the taxonomy.

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Greenwashing: the practice of gaining an unfair competitive advantage or being misleading by marketing a product as environmentally friendly, when in fact basic environmental standards have not been met. The taxonomy is designed to be a strong tool to combat greenwashing by defining a set of concrete, technical criteria for sustainability. 

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A company’s taxonomy score is related to the proportion of revenue, opex and capex that comes from activities aligned with the technical screening criteria. This contributes to combating greenwashing as companies which have only a small portion of their revenue coming from sustainable activities will get a correspondingly low score

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Climate change mitigation: the process of holding the increase in the global average temperature to well below 2 °C and pursuing efforts to limit it to 1,5 °C above pre-industrial levels, as set out in the Paris Agreement.

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Climate change adaptation: the process of adjustment to actual and expected climate change and its impacts. The taxonomy criteria for adaptation focus on climate hazards and require activities to undertake a physical climate risk assessment.

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Climate and environmental objectives: six objectives identified by the taxonomy regulation as key to achieving a transition to a sustainable and carbon neutral economy. These objectives are: climate change mitigation, climate change adaptation, the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, the protection and restoration of biodiversity and ecosystems.

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‍Eligible activity/Eligibility: an economic activity that is described and has technical screening criteria set out in the taxonomy. Such an activity is ‘eligible’ under the taxonomy and all revenue, CAPEX and OPEX for this economic activity is therefore taxonomy eligible. For example, electricity generation from wind power is an eligible activity, while electricity generation from coal is not eligible.

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‍Aligned activity/Alignment: an eligible economic activity that is making a substantial contribution to at least one of the climate and environmental objectives, while also doing no significant harm to the remaining objectives and meeting minimum standards on human rights and labour standards. The revenue, CAPEX and OPEX for such an activity is therefore aligned or in alignment.

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An economic activity that is eligible and does not meet the technical screening criteria and minimum social safeguards is not aligned.

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Substantial contribution: an economic activity can make a substantial contribution to one or more of the environmental objectives set out in the taxonomy. This means that, based on the technical screening criteria, the economic activity either has a substantial positive environmental impact or substantially reduces negative impacts of the activity on the environment.

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Do no significant harm (DNSH): an economic activity should not qualify as environmentally sustainable if it causes harm to any of the environmental and climate objectives. In the taxonomy, criteria are set out for each economic activity to ensure that as well as making a substantial contribution to one or more of the objectives, the activity does not cause harm to any of the other objectives.

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Minimum social safeguards: to be sustainable, an economic activity should be carried out “in alignment with the OECD Guidelines for Multinational Enterprises and UN Guiding Principles on Business and Human Rights, including the International Labour Organisation’s (‘ILO’) declaration on Fundamental Rights and Principles at Work, the eight ILO core conventions and the International Bill of Human Rights”. This means that any business will be required to demonstrate compliance with minimum standards on human rights, social responsibility, labour rights, and anti-corruption procedures. 

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Sustainable Finance Platform: a permanent expert group of the European Commission that has been established under Article 20 of the Taxonomy Regulation. The platform will assist the Commission in developing its sustainable finance policies, including the taxonomy. The Sustainable Finance Platform has six subgroups, including the Technical Working Group, the subgroup on data and usability, and the subgroup developing a social taxonomy.

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Technical Working Group (TWG): a subgroup of the Sustainable Finance Platform. The TWG has 32 members and 3 observers. The TWG is tasked with advising the Commission on the technical screening criteria for the environmental objectives, advising on updating technical screening criteria, and assisting the Commission in analysing requests from stakeholders for specific economic activities. Their work on technical screening criteria is divided into sector teams.

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Technical screening criteria: the specific requirements and thresholds that each activity will need to meet in order to be considered as significantly contributing to a sustainability objective and doing no significant harm to others. The technical screening criteria are set out in secondary legislation from the EU, called Delegated Acts.

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Climate Delegated Act: a delegated act to the Taxonomy Regulation that sets out the technical screening criteria for the climate change mitigation and climate change adaptation objectives.

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Environmental Delegated Act: a delegated act to the Taxonomy Regulation that sets out the technical screening criteria for the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems objectives. This is currently in a draft form.

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Enabling activity: activities that directly enable others to make a substantial contribution to an environmental objective under the taxonomy

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Transitional activity: activities for which low-carbon alternatives are not yet available. These can be aligned under the taxonomy if they have greenhouse gas emission levels that correspond to the best performance in the sector or industry. They should not hamper the development and deployment of low-carbon alternatives and should not lead to a lock-in of carbon-intensive assets.

Green Asset Ratio: Financial measure used to assess the sustainability of a company or investment portfolio. It is calculated by dividing the total value of a company's or portfolio's environmentally friendly assets by the total value of all of its assets.