In 2019, the European Union embarked on a journey towards a sustainable future by initiating the Green Deal [1]. This involves significant investments in renewable energy, biodiversity, and circular economy, setting a clear path to a climate-neutral EU by 2050. Ambitions are high, with a 55% reduction in greenhouse gas emissions targeted by 2030. To make these climate goals a reality, an investment plan of 1 trillion euros has been laid out for the coming decade. However, this commitment alone is not enough, and the Union seeks the backing of the private sector to meet the objectives of the Paris climate agreement [2]. This underlines the importance of the EU Taxonomy Regulation. 

What Is The EU Taxonomy? 

The EU Taxonomy is essentially a classification system that helps investors and companies determine whether an economic activity is environmentally sustainable. By setting clear criteria, the taxonomy aims to direct private capital towards greener projects and businesses, thereby supporting the EU’s large-scale environmental goals. It defines specific performance thresholds that activities must meet to be considered sustainable, covering areas such as climate change mitigation, climate change adaptation, sustainable use of water and marine resources, the transition to a circular economy, pollution prevention, and the protection of biodiversity and ecosystems. 

This system serves as a tool to reduce “greenwashing,” where companies falsely claim their practices or products are environmentally friendly. The rigorous criteria established by the EU Taxonomy provide transparency and reliability, ensuring that investments genuinely contribute to a sustainable future. For businesses, adhering to the taxonomy can enhance their reputation and attract eco-conscious investors. For investors, it provides a clear framework to identify and support genuinely sustainable projects, thereby aligning their portfolios with broader environmental objectives. 

The EU Taxonomy is closely linked to non-financial reporting frameworks, particularly the Corporate Sustainability Reporting Directive (CSRD). The CSRD aims to enhance and standardize sustainability reporting among European companies, making it mandatory for large firms to publicly disclose information on how their activities impact the environment, worker rights, and other social factors. By aligning with the EU Taxonomy, the CSRD ensures that the sustainability data reported by companies is consistent, comparable, and transparent. This alignment not only facilitates clearer communication between businesses and investors but also helps in assessing the true sustainability performance of companies. Consequently, the integrated approach boosts the credibility of non-financial reports and aids in steering investment towards genuinely sustainable activities. 

Which Companies Are Affected By The EU Taxonomy? 

The EU Taxonomy regulation offers a clear framework to gauge the sustainability of various economic activities. It takes into account the unique situations and responsibilities of different economic players and is categorized into three main groups: 

• Firstly, it applies to companies with over 500 employees that are subject to the non-financial reporting directive (NFRD). 
• Secondly, it applies to financial market participants, including those that provide workplace pensions, who offer and sell financial products within the EU, even if they’re based outside the EU. 
• Lastly, the EU and member state governments also require this regulation when implementing public initiatives, standards, or labels for eco-friendly finance products or corporate bonds. 

While the EU Taxonomy is mandatory for large companies under the scope of the NFRD/CSRD, businesses of any size are encouraged to voluntarily adopt this classification system. By doing so, these companies can transparently demonstrate to investors and other stakeholders that their operations or future plans align with sustainability goals. This voluntary disclosure serves as a strong signal of commitment to environmental responsibility and can help attract eco-conscious investors. For smaller companies, engaging with the EU Taxonomy can also enhance their market reputation and credibility, proving their dedication to sustainable business practices even if they are not legally required to report under the NFRD/CSRD frameworks. 

EU Taxonomy Timeline 

References: 

[1] https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en 

[2] https://www.un.org/en/climatechange/paris-agreement