What is the EU Taxonomy Regulation?

What is the EU Taxonomy Regulation?

The EU Taxonomy Regulation is a critical component of the EU Green Deal, which aims to achieve the transition to a modern, resource-efficient and competitive economy. The initial requirements of the EU Taxonomy must be implemented as of January 1, 2022. In this blog post, we explore the questions:

  • What is the EU Taxonomy?
  • What climate and environmental targets are designated?
  • What conformity of economic activities means, and what role do technical assessment criteria play in this?
  • Can further developments be expected?

The EU Taxonomy Regulation

The European Union developed the EU Taxonomy Regulation to create the transition to a modern, resource-efficient and competitive economy. It is a system for classifying economic activities to determine which activities are environmentally sustainable. Ultimately, this also helps to direct financial flows toward investments that are as sustainable as possible. 

The climate and environmental objectives

At the core of the EU taxonomy are six climate or environmental objectives: 

  • Mitigation of climate change
  • Adaptation to climate change
  • Sustainable use and protection of water and marine resources 
  • Transition to the circular economy
  • Pollution prevention and control
  • Protection and restoration of biodiversity and ecosystems

Conformity with the EU taxonomy

Economic activity is compliant with the taxonomy if:

  • It contributes to at least one of the six climate or environmental objectives. 
  • It does not significantly compromise any of the other objectives (DNSH). 
  • A minimum level of social safeguards, including fundamental human rights and labour standards (OECD Guidelines), is ensured. 

“DNSH – Do No Significant Harm – For an activity that pursues one or more of the six objectives to be considered sustainable, it must not cause significant harm to any of the other objectives in the taxonomy.”

Technical evaluation criteria as the basis

The technical assessment criteria are the basis for deciding whether an economic activity contributes significantly to achieving the above climate and environmental objectives. The Official Journal of the European Union states: 

“The technical assessment criteria used to determine whether an economic activity contributes significantly to climate change mitigation or adaptation should ensure that the economic activity has a positive impact on the climate target or that it mitigates negative impacts on the climate target. These technical evaluation criteria should therefore refer to thresholds or levels of performance that the economic activity should achieve to be considered a significant contribution to one of these climate goals. The technical evaluation criteria for “avoidance of significant adverse impacts” should ensure that the economic activity does not cause significant adverse environmental impacts. As a result, these technical evaluation criteria should specify the minimum requirements that the economic activity must meet to be considered environmentally sustainable.”

On January 1, 2022, the evaluation criteria for the first two goals, “Mitigation of Climate Change” and “Adaptation to Climate Change,” went into effect. For the remaining goals, the evaluation criteria are currently still being developed and will be available from 2023. That is also relevant, among other things, to the interplay between the EU taxonomy, the Corporate Sustainable Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR). With the introduction of the CSRD, sustainability reporting will become part of financial reporting and companies affected by the CSRD will then have to report by the European Sustainability Reporting Standard (ESRS). For companies, this means that their commitment to sustainability will achieve greater visibility and transparency. In addition to avoiding greenwashing, this simultaneously increases the chance of being noticed by financial market players. That can lead to targeted investments in these companies, which is an objective of the EU Taxonomy itself. 

What developments are in store for the EU Taxonomy?

The evaluation criteria for the first two objectives are already available. The requirements for the remaining four climate and environmental targets will follow. At the same time, there are considerations to extend the EU Taxonomy if necessary. With the transition from NFRD to CSRD, an interesting dynamic may develop from the interaction of CSRD, EU Taxonomy and SFDR. 

How we can support you

NordESG is an independent consulting company. Our consulting services address issues related to sustainability and ESG. For example, we support companies in recording their CO2 emissions and develop strategies and concepts individually tailored to the requirements of our clients. Of course, we are happy to be contacted by e-mail. Alternatively, you can make an appointment with us for a free introductory meeting by following this link. 

Further information and sources

  • Technical evaluation criteria: The technical evaluation criteria for the EU Taxonomy are available for download here.
  • Report on a possible extension of the EU Taxonomy: The Extended Environmental Taxonomy: Final Report on Taxonomy extension options supporting a sustainable transition is available here