EU Taxonomy

Written By Claire Siegrist

Enacted in 2020, the EU Taxonomy is a science-based classification system of environmentally sustainable activities. Its purpose is to direct financial flows in support of the EU Green Deal and avoid greenwashing. It affects how listed companies and financial institutions can report “green” or sustainable investments. 

In 2019, the European Commission announced the European Green Deal, a roadmap to transform the EU’s economy for sustainable development. The Green Deal sets ambitious targets such as becoming “the world’s first climate-neutral continent” by 2050. Reaching these targets requires investment and redirecting financial flows to sustainable projects. But how do we define “sustainable”? The EU seeks to address this challenge with the EU Taxonomy.


What is the EU Taxonomy regulation?

The EU Taxonomy which came into force in 2020 is a classification system of environmentally sustainable economic activities. It defines an EU-wide, scientifically enforceable definition of sustainable activities and investments to avoid greenwashing. The Taxonomy does not ban activities that are not “green”, but it limits activities which can be labeled climate-friendly.


What is a sustainable activity according to the Taxonomy?


To be a sustainable economic activity, the Taxonomy requires three criteria:

  1. Contribute substantially to one or more of the environmental objectives
  2. Do not significantly harm other objectives
  3. Comply with minimum  social and governance standards


First, the activity must substantially contribute to one of six environmental objectives:

  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


Second, the activity must “do no significant harm” (DNSH) to another objective. For example, a climate adaptation project cannot threaten the local biodiversity. Whether or not harm is caused is determined by conducting a DNSH assessment in accordance with the technical screening criteria.


Finally, the activity must comply with minimum social and governance standards. The regulation defines these as in alignment with the OECD Guidelines for Multinational Enterprises, UN Guiding Principles on Business and Human Rights, the International Labor Organization’s (ILO) Declaration on Fundamental Rights, and the International Bill of Human Rights.


Who is affected by the EU Taxonomy?


The Taxonomy primarily affects three groups in Europe: companies, financial institutions, and EU Member States.

Certain companies are required to disclose the share of activities that meet the environmental sustainability criteria of the Taxonomy. However, disclosure is only required of companies already subject to the Non-Financial Reporting Disclosure (NFRD) – to be replaced by the CSRD in 2023. While this criteria varies by member state, it generally applies to publicly traded companies with over 500 employees and/or turnover exceeding 40M€.

Additionally, financial market actors must disclose to what extent their financial products support sustainable economic activities. 

More specifically, companies and financial institutions must disclose the proportion of turnover, capital expenditure (CapEx), and operational expenditure (OpEx) eligible and aligned with the Taxonomy.

Finally, all EU Member States are required to apply the Taxonomy to future legislation and labels. Unlike EU directives which provide guidelines to member states, the Taxonomy is a regulation that applies universally to all states. 


What is the timeline for the EU Taxonomy?


The European Commission acknowledges that the Taxonomy is a “living document and will continue to evolve over time.” As of 2022, only the two climate objectives (mitigation and adaptation) in certain industries are required for disclosure. 

Both the objectives and industries covered are expected to expand over the next three years:


According to the UN Principles for Responsible Investment (UNPRI), “The EU Taxonomy represents a generational shift in responsible investment.” The EU’s move is part of broader conversations about the need for global definitions of sustainability. In 2021, the International Platform on Sustainable Finance (IPSF), co-chaired by the EU and China, published the “Common Ground Taxonomy” to serve as a basis for global sustainable finance. As countries strive for carbon neutrality in a globalized world, such tools will continue to be vital.


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