EU Taxonomy Metrics and Thresholds: What you need to know

Taxonomy Performance Thresholds and their Purpose

In December 2019, the EU taxonomy regulation was established as part of the EU Commission action plan on financing sustainable growth, in order to provide the first uniform and credible standard for economic parties to align with the transition to low carbon and sustainable pathways. The EU taxonomy hopes to achieve this uniform classification by setting performance thresholds (sometimes referred to as ‘Technical Screening Criteria’) to help in the identification of environmentally friendly activities for companies. Each threshold has a different set of criteria based on the activity it refers to, which are further defined by sector. In order to determine whether a company is aligned with a given EU taxonomy activity, it must follow the performance thresholds for that specific activity. The ultimate goal of these thresholds is to further increase sustainable performance transparency for companies and avoid greenwashing, which also explains why each threshold is specific to each activity.

What do these regulations mean for investors?

One of the other goals of the EU taxonomy is to provide security for investors who take sustainability measures into account in their portfolios. With this new regulation, there will be no room for greenwashing and will help investors allocate their investments to facilitate a sustainable transition. 

However, The EU taxonomy regulation has only recently come into effect, with companies not having to report on their taxonomy alignment until January 2023. As a result, investors who are looking to get ahead of the released disclosure statements are seeking out close estimations of which companies are Taxonomy aligned or not. There are currently very few databases providing transparency into taxonomy alignment, however, Physis has a regulation solution fully developed and available with just one click.

Even for investors that are not initially interested in socially responsible investing, the EU taxonomy represents a huge step in regulation, and in order to mitigate future risks in their investments, it will become important to pay attention to what companies are considered Taxonomy aligned or not. 

Incoming Challenges for Financial Institutions

Since this regulation has come up fairly recently, there are still a few challenges underway for companies and investors alike. Investors are anxious to get their hands on the information the EU taxonomy is said to provide, but since disclosures haven’t been properly released yet, investors have to work with estimations instead. This can lead to some issues, as information on whether a company is actually Taxonomy aligned or not may not actually be accurate to the truth. Luckily, this is an issue that will be fixed in the future as companies begin releasing disclosures relating to the EU taxonomy. Unfortunately, there are some issues with that as well.

Many of the performance thresholds presented in the EU taxonomy are specific and dense in nature. While some thresholds can be calculated fairly easily, others require more in-depth measurements that companies themselves have trouble calculating. Thresholds relating to the specific amount of carbon emissions released per product are particularly tricky for companies to calculate, especially if scope 3 emissions are to be taken into account. However, all these issues may gradually disappear over time as companies become used to the regulations and amendments are made to the EU taxonomy to further achieve its goals for the future.

Through Physis’ robust dataset, we have created a Taxonomy solution to help all EU investors simplify compliance. We cover over 355,000 funds and 10,000 companies, providing a one-stop-shop compliance solution.

Physis is a fintech company that offers investors a variety of ESG offerings and data to understand the impacts of your investments, as well as remain compliant with regulations such as EU Taxonomy alignment. We make it easy for you to start investing sustainably. Join us today!