Taxonomy
The EU Taxonomy Regulation (EU Taxonomy – Regulation (EU) 2020/852) is a Regulation introduced by the European Commission establishing criteria to define environmentally sustainable economic activities for investment purposes. Therefore, it is a classification system which establishes the conditions for certain economic activities¹ to be considered “environmentally sustainable” and, therefore, being “Taxonomy-aligned”.
An economic activity included in the EU Taxonomy is defined as “Taxonomy eligible”. However, in order to be considered “Taxonomy-aligned”, a taxonomy elegible activitie should contribute substantially to at least one of the following six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
Besides contributing to at least one of the environmental objectives, the activity must also successfully pass two other conditions to be defined as “Taxonomy-aligned”:
- Not significantly harming any other of the environmental objectives (Do No Significant Harm principle, also known as “DNSH”).
- Complying with a set of defined minimum social safeguards.
The detailed criteria to successfully pass all of the conditions mentioned in the paragraph above are established through Delegated Acts. The Delegated Act (EU) 2021/2139 clarifies the conditions for the two climate change-related objectives, while the latest Delegated Act adopted in 2023 clarifies the conditions for the remaining 4 environmental objectives.
Further details on these conditions are provided below:
- The technical screening criteria are scientific-based quantitative and qualitative requirements and thresholds that an eligible economic activity must meet to be considered “significantly contributing to a sustainable objective”. These criteria are economic activity- and environmental objective-specific.
- The Do No Significant Harm principle defines the criteria that eligible economic activities must respect to ensure that they do not generate any significant negative impact on the other EU Taxonomy objectives.
- Minimum social safeguards ensure that a company and its economic activity(ies) adhere to the following internationally-recognised standards and guidelines:
- The OECD Guidelines for Multinational Enterprises.
- The UN Guiding Principles on Business and Human Rights.
- The principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights.
The EU Taxonomy currently covers the following sectors and economic activities.
The technical screening criteria for the first two environmental objectives, namely climate change mitigation and climate change adaptation defined by the Delegated Act 2021/2139 cover economic activities of roughly 40% of listed corporates in sectors responsible for almost 80% of direct greenhouse gas emissions in Europe. Extending the EU Taxonomy criteria to the other four objectives will increase this coverage.
The EU Taxonomy currently does not cover social dimensions. The Platform on Sustainable Finance – a permanent expert group of the European Commission established to assist with the development of sustainable finance policies – published a report on Social Taxonomy in February 2022. This report includes recommendations for the development of an EU Social Taxonomy. Currently, the works and discussions towards the EU Social Taxonomy have been paused indefinitely to prioritise other EU initiatives.
Notes:
(1) An economic activity means every activity a company performs that uses resources (e.g., labour) to generate a product (e.g., goods or services).
The EU Taxonomy aims to create a framework for a common understanding of environmentally sustainable activities, aiming at scaling up investments that contribute to achieving a climate neutral economy.
Therefore, the EU Taxonomy seeks to be a transparency tool helping corporates, investors and policymakers to consider certain economic activities as environmentally sustainable thanks to scientific-based definitions and criteria.
The EU Taxonomy applies to Financial Market Participants (FMPs) and their products, and to certain companies.
The EU Taxonomy requires FMPs and certain companies to disclose the extent to which their investments or activities, respectively, are aligned with the EU Taxonomy. This disclosure is required to be included in their non-financial statement.
The definition of FMPs² follows the one set out in the Sustainable Finance Disclosure Regulation (SFDR – Regulation (EU) 2019/2088). Visit SFDR for more information.
The companies that are in scope are those to which are in scope of the Non-Financial Disclosure Directive (NFRD – Directive 2014/95/EU) that will be replaced by the Corporate Sustainable Reporting Directive (CSRD – Directive (EU) 2022/2464). These include, amongst others:
- EU-based companies which have been in scope of the NFRD;
- EU-based companies exceeding two of the following three criteria on two consecutive balance sheet dates (Large undertakings):
- 250 employees
- €40M net turnover
- €20M balance sheet
- EU-based small and medium-sized companies (SMEs) which are listed and meet two of the following three criteria:
- >10 but <250 employees
- >€700k but <€40M net turnover
- >€350k but <€20M balance sheet
These companies have to disclose information on:
- the share of turnover and/or,
- the share of expenditures (capital expenditures – CAPEX and/or operational expenditures – OPEX) related to their activities aligned with the EU Taxonomy.
Please note that CSRD foresees a specific application timeline based on the characteristics mentioned above. Visit CSRD for more information.
Notes:
(2) In general, FMPs are actors that take part in the market by purchasing and offering financial assets. Amongst others, FMPs in scope are: Alternative investment fund managers (AIFMs); UCITS management companies; Investment firms; Credit institutions providing portfolio management services.
FMPs in the scope of the EU Taxonomy must include information on the alignment of the investments of their products with the EU Taxonomy. FMPs must include this information within the periodic reports they are required to draw up for their financial products on an annual basis. The required information depends on the sustainability ambition of a product as per SFDR:
- For all products that do not have any sustainability ambition (Art. 6 products), they must include a pre-defined sentence.
- For all products that either promote environmental and/or social characteristics (Art. 8 products) or have sustainability as their objective (Art. 9 products), they must disclose the actual share of investments aligned with the EU Taxonomy as per the SFDR template (visit the SFDR section for further information).
Moreover, as mentioned in the section “To whom does it apply?” above, FMPs in scope of non-financial reporting requirements based on the NFRD and/or CSRD will have to disclose the proportion of investments that are aligned with the EU Taxonomy.
Finally, information disclosed by companies in scope of the NFRD and/or CSRD will support FMPs with their own reporting requirements by increasing the general data availability on activities that are aligned with the EU Taxonomy.
The EU Taxonomy is closely linked to the Sustainable Finance Disclosure Regulation (SFDR). As stated in recital 33 of the SFDR Regulatory Technical Standards (SFDR RTS – Delegated Regulation (EU) 2022/1288), as well as in other various articles, product-related information – including the Taxonomy-alignment of investments – have to be provided to (potential) investors. Visit SFDR for more information.
The EU Taxonomy is also linked to the Corporate Sustainability Reporting Directive (CSRD). As mentioned in the Article 8 of the EU Taxonomy, entities that are in scope of the NFRD and/or CSRD will face specific obligations for the provision of information on environmentally sustainable activities as mentioned in the sections above. Visit CSRD for more information.
- 12 July 2020: Entry into force of the EU Taxonomy.
- 30 December 2021: Entry into force of the Delegated Act on disclosures in line with the EU Taxonomy.
- 01 January 2022: Application of the first Delegated Act 2021/2139 for economic activities contributing to climate change adaptation and climate change mitigation.
- 01 January 2023: Application of the EU Taxonomy extension for specific gas and nuclear activities.
- 01 January 2024: Expected application date of the second Delegated Act for economic activities contributing to the remaining four environmental objectives.
- 22 June 2020: The EU Taxonomy was published in the Official Journal of the EU.
- 12 July 2020: The EU Taxonomy entered into force.
- 9 December 2021: Following a consultation period, a first Delegated Act 2021/2139 on sustainable activities for climate change adaptation and climate change mitigation objectives was published in the Official Journal of the EU. It is applicable since 01 January 2022.
- The second Delegated Act for the remaining four objectives was supposed to be published in 2022. The draft of this second Delegated Act was published on 5 April 2023 by the European Commission. In addition, the European Commission published an additional Delegated Act amending the first Delegated Act 2021/2139. This amendment aimed to add or complement the technical screening criteria for climate change mitigation for certain economic activities in the transport and manufacturing sectors.
- 3 May 2023: Close of the feedback period on the second Delegated Act for the remaining 4 environmental objectives.
- 27 June 2023: The proposal Delegated Act for the remaining four environmental objectives was adopted.
- 01 January 2024: Expected application of the Delegated Act for the remaining four environmental objectives will come into force.
Disclaimer: Please note that in order to ensure that this section is kept synthetic and focuses on the most relevant dates, the adoption dates have not been included here.
Currently, there is no consultation open or pending.
Regulatory texts:
- EU Taxonomy Regulation – Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088
- Delegated Act on disclosures in line with the EU Taxonomy – Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852
- Delegated Act on sustainable activities for climate change adaptation and mitigation objectives – Commission Delegated Regulation (EU) 2021/2139 of 4 June 2021 supplementing Regulation (EU) 2020/852
- Complementary Climate Delegated Act – specific gas and nuclear activities
- Delegated Act for the non-climate related environmental objectives
Other helpful links:
