Etymologically, taxonomy is a classification system. Describing something as “green” designates a classification system for economic activities that are globally sustainable. It’s therefore useful in financial dealings to indicate whether or not investments are “sustainable”. The main idea is to create a common language (or vocabulary) based on a series of identical criteria that investors can use everywhere. That should allow “greenwashing” activities to be countered, and that should also allow investors to re-target their application of funds toward companies and technologies that are sustainable in the sense of being environmentally friendly. Which should, ultimately, contribute to the goal of the EU being carbon neutral by 2050.

What are the criteria for a “sustainable activity”?

The “criteria for determining whether an economic activity qualifies as environmentally sustainable” are set out in EU Regulation 2020/852 of 18 June 2020*. Accordingly, to be considered as “environmentally sustainable”, an economic activity must contribute substantially to one or more of the environmental objectives set out in Article 9 (see box) and not cause any significant detriment to any of these objectives. The activity must also be exercised while respecting the minimum guarantees set out in Article 18 (guiding principles of the OECD and the United Nations, the ILO conventions, Human Rights etc.). And it must comply with the technical review criteria established by the Commission (cf. “Substantial contribution to each of the environmental objectives”, Art. 10 to 15).

* Learn more at: EUR-Lex – 32020R0852 – FR – EUR-Lex (europa.eu)

Note that the definition given of circular economy (cf. Art 2) is probably one of the best available. Well worth looking at.