In its simplest form, the Taxonomy is a way to classify different activities across industries of all types. The aim of this classification is to highlight those which are considered to be “Green '' from those which are considered to be harmful to the environment. This classification system has created a list of environmentally sustainable economic activities with specific criteria that provides companies, investors, and policymakers with the necessary information to become more climate-friendly. The goal is to direct funding toward sustainable growth.

In order to do this, the EU taxonomy defines 6 environmental objectives which serve to categorize the different economic activities through objective-specific screening criteria. Today, only the first two are currently part of the list of activities considered “green”, while screening criteria for the rest is still under development. The objectives are:

1. Climate change mitigation

2. Climate change adaptation

3. The sustainable use and protection of water and marine resources

4. The transition to a circular economy

5. Pollution prevention and control

6. The protection and restoration of biodiversity and ecosystems

Why should Fashion care?

There are several reasons why any industry should care, but the fashion and apparel industry has been under-regulated for years and the EU Taxonomy will have a direct impact on their annual report disclosures. It will become necessary for companies that report under CSRD (Corporate Sustainability Reporting Directive) to disclose what percentage of their activities contribute to climate change mitigation or adaptation under a set of KPIs. Furthermore, it will be necessary to come up with a strategy to increase the performance of these KPIs to favor more sustainable activities. At the french level, this will be demanded by the DPEF (Déclaration de Performance Extra-Financière).

Not only there is a regulatory concern but a risk-related one as well. Climate change poses two types of climate-related risks: physical and transitional. The physical one is easy to understand, as the world is undergoing the consequences of climate change phenomena, we see more and more natural disasters that impact several areas across the globe. Droughts and floods, cold waves and heat waves, storms, and hurricanes - we have seen a steady increase in the frequency of these events across the globe. These will continue to increase over time as a result of climate change and in turn, will impact the fashion industry at different stages of its value chain. Furthermore, the spread-out nature of this chain makes the industry more exposed and vulnerable to these physical risks. Second is the Transitional risk. As the financial system migrates to more sustainable or Green investments, companies with non-sustainable activities will be “punished” with higher interest rates to account for their elevated climate risks. This is a risk that companies within the fashion industry should take into account when assessing their overall performance. The EU Taxonomy is a very tangible manifestation of this risk as it is designed to move investment toward more sustainable activities.

Finally, there is a very good reason why the fashion industry should care: visibility. Currently, consumers across the world are more conscious and will punish companies for their irresponsibility towards environmental and social impact. As a result, the EU Taxonomy will lead to higher visibility of companies’ actual involvement with sustainability, preventing green-washing and exposing those companies that will now have to communicate the real impact of their products. 

However, at Lienzo we do not see this as a constraint, but rather as an opportunity for companies to develop sustainably. The EU Taxonomy will allow companies to attract investment to fund their transition as they implement sustainable alternatives. It will also create visibility for all of the positive measures already in place, and will allow brands to position themselves as leaders of change, capturing a market that is waiting for sustainable fashion alternatives.

SOURCES:

https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en

https://www.mckinsey.com/featured-insights/sustainable-inclusive-growth/sustainable-and-inclusive-growth-a-weekly-briefing