EU Taxonomy Regulation

EU TAXONOMYTAXONOMY

What is the EU Taxonomy?

The EU Taxonomy is a classification system, representing a pivotal market transparency tool, to channel investments into projects and economic activities essential to the transition to a net zero economy and environmental sustainability. Operating as an enabler of global best practice and an inspirer of business confidence, the EU Taxonomy establishes clear criteria that allow investors to identify investments in solutions to climate and environmental challenges.

Companies across the EU, meeting the requirements of the Taxonomy for climate change mitigation and adaptation, started reporting in 2023 under new EU law, therefore representing a significant step towards increased transparency around how companies embed sustainability objectives in their operations. This wave of reporting now also encompasses the four other environmental objectives of the Taxonomy, broadening the breadth of disclosures to provide a more holistic view of environmental performance.

Early signs suggest companies, public entities and financial institutions are increasingly using the Taxonomy to centre business strategies, guide transition plans and inform investment and lending decisions. Its pervading influence on financial and business operations demonstrates the Taxonomy’s emerging importance as a cornerstone in the desire for a more sustainable and climate-resilient economy.

Scope of EU Taxonomy

The EU Taxonomy helps investors, companies and policymakers identify environmentally sustainable economic activities. It aims to divert capital to sustainable activities and tackle “greenwashing” by setting an industry standard for what qualifies as “sustainable”. The impact is broad-based, spanning several stakeholder groups and sectors:

1. Companies
  • Listed Companies: Large publicly listed companies within the EU, particularly those subject to the Non-Financial Reporting Directive (NFRD), are required to disclose how their activities align with the Taxonomy.
  • Large Non-listed Companies: Companies with over 500 employees, even if they are not publicly listed, must also comply if they fall under the NFRD or its successor, the Corporate Sustainability Reporting Directive (CSRD).
  • Financial Institutions: Banks, asset managers, insurers, and pension funds must disclose the proportion of their portfolios aligned with the Taxonomy criteria. This includes the proportion of sustainable investments they hold and how they meet Taxonomy requirements.
2. Sectors and Economic Activities

The Taxonomy applies to a wide range of sectors, focusing on those that have a significant environmental impact. Key sectors include:

  • Energy (renewable energy, energy efficiency, and electricity generation)
  • Manufacturing
  • Transport
  • Water supply and waste management
  • Construction and real estate
  • Information and communication technology (ICT)
  • Agriculture and forestry

The Taxonomy defines criteria for economic activities within these sectors that contribute substantially to one or more of the six environmental objectives:

  1. Climate change mitigation
  2. Climate change adaptation
  3. Sustainable use and protection of water and marine resources
  4. Transition to a circular economy
  5. Pollution prevention and control
  6. Protection and restoration of biodiversity and ecosystems
3. Investors

Institutional investors and asset managers are compelled to explain their application of the Taxonomy in their investment-making process – this will entail detailing how their assets connect with sustainable activities under the Taxonomy to enable investors to make informed choices around the sustainability of their portfolios.

4. Public Authorities

The Taxonomy can be used by EU and national public bodies as a basis for sustainable finance policy, public expenditure and public investment programmes. The upshot of this is the direction of taxpayer money towards endeavours that are categorically sustainable environmentally.

5. Small and Medium Enterprises (SMEs)

Although not in the direct line of fire for mandatory disclosure under the Taxonomy, the impact could be indirect. SMEs may feel the effects as part of the supply chain to larger companies or through their desire to catch hold of sustainable funding.

6. Sustainable Bond and Green Finance Markets

Issuers of green bonds or sustainable financial products can employ the Taxonomy to clarify how the advocated proceeds will be allocated to Taxonomy-aligned activities, thereby increasing transparency in green finance markets. The scope of the EU Taxonomy is due to enlarge with the formulation of further criteria for other sectors and environmental objectives beyond climate change.

Six Environmental Goals

Related to EU Taxonomy
Climate change mitigation
Climate change adaptation
Sustainable use & protection of water resources
Transition to a circular economy
Pollution prevention & control
Protection & restoration of biodiversity & ecosystem

The EU Taxonomy is built around six environmental objectives, each designed to help guide financial and business activities toward a more sustainable economy. These goals are critical to addressing environmental challenges, promoting transparency in financial markets, and directing investment toward environmentally sustainable projects. Here’s why these six environmental goals are important:

1. Climate Change Mitigation

Purpose: To curb or prevent greenhouse gas (GHG) emissions, echoing the EU’s vow to get to net zero emissions by 2050 under the European Green Deal and the Paris Agreement.

  • Why We Have It: Climate change poses significant risks to ecosystems, human health and worldwide economies. By focusing on activities that directly reduce emissions (e.g. renewable energy, energy efficiency), the EU Taxonomy is the catalyst for advancing the transition to a low carbon economy and averting the brunt of future climate change impacts.
2. Climate Change Adaptation

Purpose: To reinforce economies, infrastructure and ecosystems to better withstand the onslaught of climate change, such as extreme weather patterns, rising ocean levels and climbing temperatures.

Why We Have It: The impacts of climate change, in the face of ongoing greenhouse gas emissions, are well and truly in play. This need to adapt to these changes is vital to minimise social and economic disruptions arising from climate dangers.

3. Sustainable Use and Protection of Water and Marine Resources

Purpose: To safeguard water quality, ensure sustainable water use, and protect marine ecosystems from pollution, overfishing, and degradation.
Why We Have It: Water scarcity, pollution, and the degradation of marine ecosystems are growing global challenges. Freshwater and marine resources are essential for human life, biodiversity, agriculture, and industry. This goal aims to promote sustainable water management and protect marine environments from over-exploitation and damage.

4. Transition to a Circular Economy

Purpose: To move away from a linear economy (take-make-dispose) toward a circular economy where resources are reused, recycled, and kept in use for as long as possible.
Why We Have It: The linear economic model leads to resource depletion, waste, and pollution. By promoting circular economy principles, the EU Taxonomy encourages businesses to reduce waste, minimize resource extraction, and reuse materials. This helps reduce environmental impact and supports long-term sustainability by making more efficient use of finite resources.

5. Pollution Prevention and Control

Purpose: To minimize pollution of air, water, and soil, and reduce the release of harmful chemicals and waste into the environment.
Why We Have It: Pollution from industrial activities, agriculture, and urbanization significantly harms ecosystems, human health, and biodiversity. By emphasizing pollution prevention, the Taxonomy aims to support activities that reduce or eliminate the release of harmful substances, thereby improving public health and reducing the environmental footprint of economic activities.

6. Protection and Restoration of Biodiversity and Ecosystems

Purpose: To halt the degradation of ecosystems, protect endangered species, and promote the restoration of natural habitats and biodiversity.
Why We Have It: Biodiversity loss and ecosystem degradation threaten food security, climate regulation, and the provision of clean air and water. By focusing on the protection and restoration of natural systems, this goal seeks to reverse biodiversity decline and ensure ecosystems continue to provide essential services. Healthy ecosystems are critical to both the environment and the economy, as they support agriculture, fisheries, and tourism, among other sectors.

Why These Goals Matter Collectively

The six environmental goals of the EU Taxonomy are designed to work in harmony, addressing the most pressing environmental challenges of our time. They reflect the need for a systemic transformation across sectors and regions to ensure long-term sustainability.

  • Promoting Sustainable Investment: By setting clear criteria for what counts as environmentally sustainable, the EU Taxonomy channels investments into activities that contribute to achieving these objectives. This helps create a sustainable finance market where capital is allocated to projects and companies that support a green transition.
  • Preventing Greenwashing: The goals ensure that companies cannot falsely label their activities as “green” unless they meet rigorous, evidence-based criteria. This transparency helps investors and consumers make informed decisions.
  • Aligning with Global Climate and Environmental Targets: The EU Taxonomy aligns with the EU’s broader climate and environmental goals, such as the Paris Agreement, the European Green Deal, and the UN Sustainable Development Goals (SDGs). It supports global efforts to mitigate climate change, protect biodiversity, and promote sustainable development.

In essence, these six goals are about steering the economy towards a sustainable future, balancing economic growth with environmental preservation.

Current Adoption

The EU Taxonomy is increasingly being used by companies to guide and disclose investments in sustainable activities. On average, around 20% of capital investments is now reported as compliant with the Taxonomy criteria, with the utilities sector, and particularly electricity suppliers, reaching over 60% compliance.

Capital expenditures in Taxonomy-aligned activities almost doubled in 2024 compared to the previous year. In 2023, about 600 European companies disclosed €191 billion’s worth of capital investments in Taxonomy-aligned projects. As of May 2024, reported capital investments already amounted to €249 billion, suggesting strong growth. Therefore, the total combined for 2023 and early 2024 now stands at €440 billion, with this figure likely to rise with the inclusion of the Taxonomy’s four supplementary environmental objectives, expanding slightly the universe of eligible activities and companies. A breakdown by sector shows the utilities sector to be where the largest investments have taken place, followed by consumer discretionary, industrials, energy and real estate. The number of companies disclosing such investments has also increased, 723 companies having reported in 2023, up from 608 in 2022, illustrating broader take-up. Germany has stood out for Taxonomy-aligned investments with €114 billion, followed by France (€63 billion), Spain (€60 billion) and Italy (€48 billion).

Stock market data indicates a link between Taxonomy alignment and positive market performance, the stronger the alignment the better the stock market performance of companies with consistently higher alignment levels compared to the overall market in the last few years.

Banks & Financial Markets

European banks are more and more integrating the EU Taxonomy into their lending policies and assessment framework for the investments of companies. This integration guarantees that the financial sector channels investments into projects that are sustainable. Initial figures show that lending and lending-like activities to activities aligned with the Taxonomy on average now make up over 50% of the balance sheets in large EU banks. This illustrates how the Taxonomy is increasingly guiding the financial sector in environmentally sustainable investments practices.

In parallel with the change in banking behavior, the EU remains the largest green bond issuer globally. In 2023, more than 50% of all global green bond issuance was from the European Union. This demonstrates the EU’s commitment to financing sustainability and its continued leadership of green financial instruments in international financial markets.

Funds

56% of EU funds either promote environmental or social characteristics or have a sustainable investment objective as disclosed according to the Sustainable Finance Disclosure Regulation (SFDR)[5]. The assets aligned with the Taxonomy form a small, but growing part of what these funds invest in.

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CSRD vs EU Taxonomy

The EU Taxonomy and Corporate Sustainability Reporting Directive (CSRD) work together to enhance corporate accountability and transparency, creating a cohesive framework for sustainability in the corporate sector.

1. EU Taxonomy: Defining Sustainability

  • Classification Tool: The EU Taxonomy defines which economic activities are sustainable, providing a common language for companies, investors, and policymakers.
  • Key Objectives: It focuses on six environmental goals, like climate mitigation and pollution control, ensuring activities contribute meaningfully.
  • Driving Investments: By establishing sustainability criteria, the Taxonomy directs investments toward activities supporting the green transition, aiding the EU’s climate ambitions.

2. CSRD: Enhancing Transparency

  • Mandatory Disclosure: The CSRD mandates companies to report how their activities align with the EU Taxonomy, enhancing data transparency.
  • Broader Applicability: It extends reporting requirements to more companies, including large and listed SMEs, thus widening the scope of accountability.
  • Detailed Metrics: Companies must disclose ESG performance, ensuring stakeholders have reliable data to evaluate sustainability efforts.

3. How EU Taxonomy and CSRD Work Together

  • Alignment and Synergy: The Taxonomy defines sustainability standards, while the CSRD ensures companies disclose performance against those standards, aligning strategy with accountability.
  • Better Decision-Making: These regulations guide informed decisions by clarifying sustainability definitions and requiring transparent reporting, supporting responsible investments.
  • Driving Economic Resilience: By combining clear standards with reporting, the EU integrates sustainability into corporate strategy, aiming for carbon neutrality by 2050.

4. Impact on Corporate Strategies

  • Corporate Transformation: Companies adapt their business models to align with Taxonomy standards, moving towards more sustainable practices.
  • Level Playing Field: Clear definitions and disclosures provide a uniform assessment basis, reducing greenwashing by requiring verifiable sustainability evidence.

5. Future of Sustainable Finance

  • Boosting Green Finance: The synergy between Taxonomy and CSRD fosters sustainable finance, strengthening investor confidence in ESG performance.
  • Sector-Wide Change: Beyond financial performance, these regulations promote innovation, pushing companies across industries like energy and agriculture to create sustainable value.

High-Level Process

For EU Taxonomy
1
Step 1
Eligibility Assessment
2
Step 2
Activity Analysis
3
Step 3
Financial Mapping

1) Eligibility assessment:

Leveraging both finalized and draft legislation detailed in the following section, we comprehensively identify all eligible activities within our business. A consolidated list of reportable activities is then generated, alongside the identification of subject matter experts (SMEs) within each business area to facilitate the subsequent analysis phase.

2) Activity analysis:

We rigorously assess the alignment of our activities with the EU Taxonomy, conducting a detailed review against all Technical Screening Criteria, Do No Significant Harm (DNSH), and Minimum Social Safeguards (MSS) requirements. To streamline and enhance this process, we will be exploring the potential of extending Greenly software to ensure a clear and well-supported audit trail.

3) Financial mapping:

Subsequent to identifying eligible and aligned activities through the previous steps, we leverage existing and modified reports derived from our financial systems to report the financial Key Performance Indicators (KPIs) as stipulated in the EU Taxonomy.

Summary of the Alignment

EU Taxonomy
Environmental Objective Eligible Activities (%) Taxonomy-Aligned Activities (%)
Climate change mitigation 23% 8%
Climate change adaptation 5% 15%
Water and marine resources 23% 8%
Circular economy 23% 8%
Pollution prevention and control 5% 15%
Biodiversity and ecosystems 1% 15%

Eligibility vs. Alignment Analysis Across Key Environmental Objectives

The EU Taxonomy establishes a systematic framework to assess the sustainability of economic activities, with the objective of guaranteeing consistency with the EU’s climate and environmental objectives. A detail by detail analysis of sectors under the umbrella of the EU Taxonomy’s main objectives in terms of the environmental criteria; the eligibility and the so-called alignment rate of the various activities:

Climate Change Mitigation

Today 23% of economic activities meet the criteria for climate change mitigation under the EU Taxonomy, but only 8% are actually aligned as climate change mitigating. The large discrepancy between eligibility and alignment indicates that businesses need to step-up efforts to meet the strict sustainability criteria of the Taxonomy. That is, while many activities qualify on paper, fulfilling criteria in practice, in technical- and performance-standards is difficult. This gap can serve as a call for action between companies and refining practices for better sustainability alignment.

Climate Change Adaptation

In climate change adaptation, the alignment rate (15%) is significantly above the eligibility rate (5%). This suggests a strong focus on building resilience to climate impacts and that companies are focusing on these actions, even if fewer actions are initially eligible. The trend suggests that stakeholders see the strategic importance of adaptation activities that protect operations from climate risks and leverage the increasing attention to climate resilience.

Water and Marine Resources

The eligibility rate and alignment rate for water and marine resources, 8% each, suggest that the range of eligible activities is still somewhat constrained, but that efforts to align with sustainability goals are maintained. This even match also shows that stakeholders can engage in and promote sustainable water management and marine resource conservation, towards better conservation and management in these critical domains.

Circular Economy

In circular economy, 23% of surveyed activities are concept-eligible, but only 8% are congruent. This gap suggests some challenges to fully moving away from the traditional linear to a circular model with minimum waste, and reusing resources. To move towards alignment, targeted investments, technological development and policy backing will help address the hurdles for switching to circular economy by bodies such as other industries.

Pollution Prevention and Control

There is a positive trend in pollution prevention and control, showing an alignment of 15% compared to eligibility of 5%, indicating that effective measures and advanced technologies are being applied in practice to tackle pollution challenges, delivering significant alignment in excess of what is eligible today. This progress demonstrates that specific measures applied to minimize pollutants are working well and highlights the role of innovation and regulatory standards in reducing environmental harm.

Biodiversity and Ecosystems

Despite a 1% of eligibility, biodiversity and ecosystems protection has a 15% of alignment rate, reflecting a significant influence from niche project targeting. Such niche projects, while rare, demonstrate clear success in improving biodiversity and ecosystem conditions, suggesting an opportunity to expand these results through broader adaptation of natural habitat-positive and biodiversity-restoration enabling practices by other stakeholders.

Conclusion

The comparison between eligibility and alignment across these environmental goals reveals important insights into where progress is being made and where challenges remain. For climate change mitigation and circular economy, the gaps between eligibility and alignment highlight areas that need greater focus, policy support, and investment to overcome barriers. Conversely, the higher alignment rates in climate change adaptation, pollution control, and biodiversity indicate successful strategies that could be leveraged and expanded to drive further positive impact. The EU Taxonomy, by setting clear criteria, continues to provide a critical framework for guiding these improvements and advancing overall environmental sustainability.

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