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What is the EU Taxonomy?
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The EU Taxonomy is a landmark framework designed to guide sustainable investments and support the European Union's ambitious climate goals under the European Green Deal. As the EU ramps up efforts to reduce GHG emissions, the Taxonomy provides a classification system for determining which economic activities can be considered environmentally sustainable. By offering clear criteria, it helps investors and businesses align their financial activities with sustainability targets, reducing greenwashing and promoting genuine progress toward a low-carbon economy.
👉 In this article, we'll break down what the EU Taxonomy is, how it works, the criteria for sustainable activities, and its broader impact on businesses and financial markets.
Understanding the EU Taxonomy
The EU Taxonomy is a classification framework designed to identify and promote environmentally sustainable economic activities. It was introduced as part of the EU’s sustainable finance strategy to ensure that capital flows are directed towards projects and businesses that contribute to the EU’s climate and environmental objectives.
At its core, the EU Taxonomy provides a system to determine whether an economic activity is environmentally sustainable, helping investors and companies align their financial strategies with global climate goals. The regulation is legally binding for large companies and financial market participants, making it a critical component in driving corporate transparency and accountability regarding sustainability efforts.
What is the purpose of the EU Taxonomy?
The EU Taxonomy was developed to:
- Guide sustainable investment: By providing a consistent framework, it ensures financial resources are allocated to genuinely sustainable projects rather than activities misleadingly marketed as 'green'.
- Support the EU’s climate goals: The Taxonomy aligns with the European Green Deal and the EU’s objective to become climate neutral by 2050.
- Prevent greenwashing: It establishes clear, science-based criteria to determine which economic activities can be classified as sustainable, ensuring transparency in sustainability claims.
The six environmental objectives
The EU Taxonomy is structured around six key environmental objectives, designed to cover the full spectrum of sustainability challenges:
- Climate change mitigation: Reducing greenhouse gas emissions and promoting low-carbon technologies.
- Climate change adaptation: Improving resilience to the impacts of climate change.
- Sustainable use and protection of water and marine resources: Preventing water pollution and promoting water efficiency.
- Transition to a circular economy: Encouraging resource efficiency, recycling, and waste reduction.
- Pollution prevention and control: Minimising harmful emissions and pollutants.
- Protection and restoration of biodiversity and ecosystems: Preserving natural habitats and biodiversity.
For an activity to be considered sustainable under the EU Taxonomy, it must contribute substantially to at least one of these objectives while complying with strict environmental criteria.
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Criteria for sustainable activities
To determine whether an economic activity can be classified as sustainable under the EU Taxonomy, it must meet a set of four rigorous technical criteria. These criteria ensure that activities contribute meaningfully to the EU’s environmental goals while avoiding harm in other areas. The framework is designed to prevent greenwashing by providing a clear, science-based standard for sustainability.
1. Substantial contribution
An activity must make a substantial contribution to at least one of the six environmental objectives outlined in the EU Taxonomy. This means the activity should significantly advance climate or environmental goals, such as:
- Reducing carbon emissions through renewable energy projects.
- Improving energy efficiency in building design and renovations.
- Enhancing biodiversity through reforestation or conservation efforts.
The technical screening criteria specify thresholds for each objective, ensuring that the activity provides measurable, positive environmental impact.
2. Do no significant harm (DNSH)
While contributing positively to one objective, the activity must also do no significant harm to the other five objectives. This requirement ensures that sustainability efforts in one area don’t come at the expense of other environmental priorities.
For example:
- A wind energy project may reduce carbon emissions but could still be excluded if it disrupts protected biodiversity areas.
- Waste recycling facilities must manage emissions and pollutants effectively to avoid harming water quality.
The DNSH principle ensures a holistic approach to sustainability, preventing partial or misleading claims about an activity’s environmental impact.
3. Minimum safeguards
In addition to environmental criteria, the EU Taxonomy requires compliance with minimum social and governance safeguards. These align with international standards like the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
Key requirements include:
- Respecting human rights and labor standards.
- Preventing corruption, bribery, and unethical business practices.
- Ensuring good corporate governance practices.
4. Comply with the applicable technical screening criteria
An activity must also comply with the applicable technical screening criteria (TSC), which set science-based thresholds and performance metrics for each environmental objective. These criteria ensure activities meet measurable sustainability standards and avoid greenwashing.
For example:
- Renewable energy: Solar projects must meet efficiency thresholds and avoid harming biodiversity.
- Energy efficiency in buildings: New constructions must meet strict energy performance ratings.
The TSC are periodically updated to reflect scientific advancements, ensuring the criteria remain aligned with the EU’s sustainability goals.
Why these criteria matter
These criteria ensure a high standard of sustainability that goes beyond superficial environmental claims. They help to:
- Enhance transparency by clearly defining what qualifies as sustainable.
- Promote accountability among businesses and investors.
- Encourage comprehensive sustainability efforts across dimensions.
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Implementation timeline and reporting requirements
The EU Taxonomy has been introduced through a phased approach, with gradual implementation to ensure businesses and financial institutions have time to adapt to the regulatory requirements. The focus has been on increasing transparency and standardizing sustainability disclosures to prevent greenwashing while directing capital toward genuinely sustainable activities.
Phased implementation timeline
The EU Taxonomy’s rollout has followed a structured timeline since its adoption:
- June 2020: The EU Taxonomy Regulation was formally adopted as part of the European Green Deal and Sustainable Finance Action Plan.
- January 2022: Reporting requirements for the first two environmental objectives - climate change mitigation and climate change adaptation - came into effect for large companies and financial market participants.
- January 2024: Reporting obligations expanded to cover the remaining four environmental objectives (water, circular economy, pollution prevention, biodiversity).
- January 2025: Full compliance expected, with technical screening criteria for all six objectives and enhanced disclosure requirements fully in force across all relevant sectors.
Who needs to comply?
The EU Taxonomy primarily applies to:
- Large Companies: Companies already required to disclose under the Non-Financial Reporting Directive (NFRD) and, more recently, the Corporate Sustainability Reporting Directive (CSRD).
- Financial Market Participants: Investors and asset managers marketing financial products in the EU, ensuring their portfolios align with sustainable activities.
- Listed SMEs (Phased Approach): Listed small and medium-sized enterprises will be phased into reporting obligations under the CSRD starting in 2026.
Reporting requirements
Companies subject to the EU Taxonomy must disclose how their activities align with the regulation using specific Key Performance Indicators (KPIs):
- Turnover: The proportion of revenue generated from EU Taxonomy-aligned activities.
- Capital Expenditures (CapEx): Investment in assets or projects aligned with the Taxonomy’s criteria.
- Operating Expenditures (OpEx): Costs related to the maintenance and operation of Taxonomy-aligned assets or projects.
- Accompanying qualifying information: Companies must explain their accounting policies, detailing how turnover, capital, and operational expenditures were calculated and allocated.
How are companies expected to report?
- Transparency and consistency: Reports must be standardized and aligned with the European Sustainability Reporting Standards (ESRS) under the CSRD framework.
- Third-party verification: While not mandatory, third-party audits are encouraged to enhance credibility and avoid greenwashing.
- Digital reporting tools: The European Commission has developed digital tools to support accurate data collection and streamline compliance.
Consequences of non-compliance
Failure to comply with the EU Taxonomy reporting requirements can lead to:
- Reputational risks, including accusations of greenwashing.
- Difficulty in accessing sustainable finance and investment capital.
- Potential regulatory penalties, particularly under the CSRD framework.
Recent developments and updates
The EU Taxonomy continues to evolve, with recent updates reflecting both the expansion of criteria and ongoing debates over the inclusion of certain energy sources. These developments aim to refine the framework while balancing scientific rigor with political and economic realities.
Expansion to all six environmental objectives
Initially, the EU Taxonomy focused on the first two objectives: climate change mitigation and climate change adaptation. However, as of January 2024, the Taxonomy now covers all six environmental objectives:
- Sustainable use and protection of water and marine resources.
- Transition to a circular economy.
- Pollution prevention and control.
- Protection and restoration of biodiversity and ecosystems.
This expansion requires businesses to assess their activities against more comprehensive sustainability criteria, broadening the scope of the regulation and increasing the complexity of compliance.
Inclusion of nuclear and gas energy
In a controversial move, the EU officially included nuclear energy and natural gas as Taxonomy-aligned activities under specific conditions starting in 2023. These additions sparked debate due to their environmental impact and the potential for misuse of the framework for greenwashing.
Key conditions for inclusion:
- Natural gas: Must replace more carbon-intensive energy sources like coal and meet strict emission limits (below 270g CO₂/kWh).
- Nuclear energy: Must comply with the latest safety standards and demonstrate proper waste management strategies.
While these additions aim to support Europe’s energy transition, critics argue they weaken the Taxonomy's credibility by classifying transitional fuels as sustainable.
Technical screening criteria (TSC) updates
The Technical Screening Criteria (TSC) were updated to clarify what constitutes a substantial contribution for all six objectives. Key changes include:
- More detailed metrics for biodiversity protection and pollution control.
- Stricter requirements for circular economy practices, including waste reduction targets.
- Refined thresholds for renewable energy projects and low-carbon technologies.
Market uptake and impact
The EU Taxonomy's influence continues to grow, with financial institutions increasingly using it to screen investment portfolios and design green financial products. However, many companies still face challenges in interpreting the complex technical requirements, especially in sectors without fully defined screening criteria.
- Clarifications on the EU Taxonomy: On November 29, 2024, the European Commission published a set of frequently asked questions (FAQs) to support stakeholders in implementing the EU Taxonomy. This initiative aims to simplify the framework and reduce the administrative burden on companies applying the sustainable finance guidelines.
The next phase of the EU Taxonomy
Looking ahead, the European Commission plans to:
- Further refine the criteria for transitional and enabling activities.
- Explore expanding the Taxonomy to cover social sustainability factors, complementing the environmental focus.
- Increase digital tools and reporting platforms to streamline compliance for companies.
Challenges
While the EU Taxonomy is widely regarded as a landmark initiative for sustainable finance, its implementation has not been without challenges and criticism. Some of the key concerns relate to its complexity, political influence, and the practical difficulties faced by businesses trying to comply.
| Challenge | Description |
|---|---|
| Complexity and Interpretation | The technical screening criteria are highly detailed and complex, making it difficult for companies—especially SMEs—to interpret and apply them consistently. This complexity often results in discrepancies in how businesses classify and report their sustainability efforts. |
| Data Availability and Verification | Accurate sustainability reporting requires access to granular environmental performance data, which many companies struggle to collect. Smaller businesses often lack the resources to meet data demands, and there are limited standardized datasets available, increasing the risk of inconsistent reporting. |
| Inclusion of Nuclear and Gas Energy | The inclusion of nuclear and natural gas under strict conditions has sparked significant criticism. While nuclear energy is low-carbon, concerns around radioactive waste management persist. Natural gas, although less polluting than coal, still emits substantial carbon, leading critics to argue its inclusion weakens the framework’s climate integrity. |
| Greenwashing Risks | Despite its rigorous criteria, the Taxonomy still leaves room for greenwashing. Companies may claim partial alignment even when only a small portion of their activities meet the sustainability requirements. The allowance for gas as a transitional fuel has also raised concerns that high-emission industries could continue under a “green” label. |
| Global Alignment and Interoperability | While the EU Taxonomy sets a global benchmark, other regions (like the UK and China) are developing their own versions with varying thresholds and metrics. This fragmentation complicates cross-border investments and makes it harder for multinational corporations to ensure consistent sustainability reporting across regions. |
Future outlook for the EU Taxonomy
The EU is considering a move towards simplifying sustainability reporting by consolidating key frameworks, including the EU Taxonomy Regulation, CSRD, and CSDDD, into a single regulation. Announced in November 2024 by European Commission President Ursula von der Leyen, this initiative aims to reduce administrative burdens and streamline ESG disclosures, responding to the Budapest Declaration's call for a 25% reduction in reporting requirements by mid-2025.
Further updates are expected to include refinements to the Technical Screening Criteria (TSC) for clarity and consistency, stricter conditions for nuclear and gas activities, and potential expansion into social sustainability factors like labour standards and community impact. These changes aim to balance simplicity with robust sustainability standards while ensuring alignment with global frameworks.
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How Greenly can help your company
Greenly offers expert support to help businesses navigate sustainability challenges, including compliance with the EU Taxonomy and other regulatory frameworks. Our carbon management solutions are designed to streamline sustainability reporting and drive meaningful progress toward emissions reduction.
Our Services Include:
- Carbon Accounting and Reporting: Our platform helps companies measure, track, and disclose their carbon emissions, aligning with key sustainability standards.
- Life Cycle Assessments (LCAs): We provide detailed LCAs to assess the environmental impact of products and services across their entire life cycle.
- Supply Chain Sustainability: Greenly assists in identifying and working with sustainable suppliers to improve overall supply chain sustainability.
- Tailored Action Plans: Our experts support companies in the creation of customized decarbonization strategies to help reduce emissions and align with global sustainability goals.
- Regulatory Support: Our tools and expertise support businesses in measuring and managing their carbon footprint, making sustainability reporting more transparent and effective.
By partnering with Greenly, companies can gain valuable insights into their sustainability performance, reduce emissions, and make informed decisions that contribute to a greener future. Get in touch with us today.
Sources
- European Commission, EU taxonomy for sustainable activities, https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en
- European Commission, FAQ: What is the EU Taxonomy and how will it work in practice?,https://finance.ec.europa.eu/system/files/2021-04/sustainable-finance-taxonomy-faq_en.pdf
- Envoria, The EU Taxonomy environmental objectives 1–6 explained, https://envoria.com/insights-news/the-eu-taxonomy-environmental-objectives-1-6-explained
- European Commission, EU Taxonomy Navigator, https://ec.europa.eu/sustainable-finance-taxonomy/
- EU Taxonomy Info, EU Taxonomy Timeline, https://eu-taxonomy.info/info/eu-taxonomy-timeline
- Envoria, What is the EU Taxonomy and which companies are required to report? https://envoria.com/insights-news/what-is-the-eu-taxonomy-and-which-companies-are-required-to-report
- Ecobio Manager, EU Taxonomy KPIs – the Key Performance Indicators of Sustainable Finance, https://ecobiomanager.com/eu-taxonomy-kpis-the-key-performance-indicators-of-sustainable-finance/
- EU Parliament, EU taxonomy: Delegated acts on climate, and nuclear and gas, https://www.europarl.europa.eu/RegData/etudes/BRIE/2022/698935/EPRS_BRI(2022)698935_EN.pdf
- European Commission, General Publications Frequently asked questions on the EU taxonomy, https://finance.ec.europa.eu/publications/frequently-asked-questions-eu-taxonomy_en
Skadden, EU Seeks To Simplify ESG Reporting Obligations, https://www.skadden.com/insights/publications/2024/11/eu-seeks-to-simplify-esg-reporting-obligations
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