EU Taxonomy for Sustainable Activities

The EU Taxonomy is a classification system establishing a list of environmentally sustainable economic activities, providing companies, investors, and policymakers with a common language for identifying activities that make a substantial contribution to environmental objectives.

Established by Regulation (EU) 2020/852 (the Taxonomy Regulation), the EU Taxonomy is a cornerstone of the EU's sustainable finance strategy. It defines six environmental objectives and sets technical screening criteria that economic activities must meet to qualify as "taxonomy-aligned." The regulation applies to EU member state measures, financial market participants offering products in the EU, and large companies required to report under the Corporate Sustainability Reporting Directive (CSRD).

Six Environmental Objectives

The Taxonomy defines six environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. Technical screening criteria for the first two objectives (climate) were adopted in June 2021 via the Climate Delegated Act, while criteria for the remaining four objectives were adopted in June 2023 via the Environmental Delegated Act.

Alignment Criteria

For an economic activity to be considered taxonomy-aligned, it must satisfy four conditions: it must make a substantial contribution to at least one of the six environmental objectives, it must do no significant harm (DNSH) to any of the other five objectives, it must comply with minimum social safeguards (aligned with the OECD Guidelines, UNGPs, and ILO conventions), and it must meet the relevant technical screening criteria established in the delegated acts.

Disclosure Requirements

Companies subject to the CSRD must disclose the proportion of their turnover, capital expenditure (CapEx), and operating expenditure (OpEx) that is taxonomy-eligible and taxonomy-aligned. Financial institutions must disclose the Green Asset Ratio (GAR) showing the proportion of their assets financing taxonomy-aligned activities. These disclosures enable investors to compare the sustainability profiles of companies and financial products.

Controversies and Challenges

The inclusion of nuclear energy and natural gas in the Complementary Climate Delegated Act (2022) proved highly controversial, with several member states and environmental groups challenging the decision. Other challenges include the complexity of the technical screening criteria, data availability for value chain assessments, and the binary nature of alignment (activities are either aligned or not, with no partial credit).

Further Reading

• EU Taxonomy Compass — Interactive tool for exploring criteria
• Platform on Sustainable Finance — Advisory body recommendations

Related Topics

• Green Taxonomies
• SFDR
• ESRS