The EU taxonomy establishes a unified classification system aimed at advancing environmentally sustainable economic activities within the European Union. Designed to support investors, corporations, and policymakers, this framework is pivotal in promoting genuine sustainable practices and preventing greenwashing. The taxonomy provides clear criteria to identify "green" activities, thereby facilitating sustainable investments.
Who is required to report?
Entities subject to the Corporate Sustainability Reporting Directive (CSRD) must disclose in their annual reports the extent to which their operations align with the EU Taxonomy. This includes demonstrating both Taxonomy-eligibility and Taxonomy-alignment as per the criteria in the Taxonomy delegated acts. Companies outside the CSRD's purview may also opt to disclose this information voluntarily, often to access sustainable financing or for strategic business reasons.
Implementation timeline
1 January 2022: The initial phase of the EU taxonomy became operative, requiring organizations to report the proportion of their revenue derived from activities that align with the taxonomy's first two environmental objectives: climate change mitigation and adaptation.
1 January 2023: The second phase commenced, extending reporting requirements to cover all six environmental objectives of the taxonomy.
Reporting content: key questions
The reporting framework seeks answers to specific questions across multiple dimensions, including:
Alignment with environmental objectives: Identifying the environmental objectives contributed to by the activity. The six environmental objects are listed below:
Climate Change Mitigation
Climate Change Adaptation
Sustainable Use and Protection of Water and Marine Resources
Transition to a Circular Economy
Pollution Prevention and Control
Protection and Restoration of Biodiversity and Ecosystems
Substantial contribution: Detailing the activity's significant contribution to the environmental objectives and adherence to technical screening criteria.
Do no significant harm (DNSH): Ensuring activities do not significantly harm other environmental objectives.
Minimum safeguards: Compliance with human rights, labor rights, and anti-corruption standards.
Financial aspects: Reporting the financial impact of environmentally sustainable activities.
Technical criteria & methodology: The criteria and methodologies used for assessing sustainability.
Key performance indicators (KPIs): Establishing and aligning KPIs with the Taxonomy Regulation.
Stakeholder engagement & governance: Engagement strategies and governance processes for Taxonomy alignment.
Forward-looking information: Future plans for increasing alignment with the EU Taxonomy.
Transparency & reporting: Transparency in reporting and any external verifications obtained.
Updates & continuous improvement: Plans for staying updated with the Taxonomy and improving alignment over time.
Strategic implications
The EU Taxonomy, alongside the CSRD and SFDR, forms a comprehensive framework for sustainable investment and corporate reporting. This interconnected system simplifies compliance, enhances transparency in financial markets, and underpins strategic decision-making for sustainable growth. As such, the EU Taxonomy not only defines what constitutes environmentally sustainable economic activities but also mandates reporting standards for companies, thus fostering a transparent, sustainable investment ecosystem.
Future developments
By 30 June 2024, a review of the EU Taxonomy's application is scheduled, indicating ongoing refinement and adaptation of this regulatory framework to evolving environmental and market needs. This underscores the EU's commitment to enhancing the effectiveness and applicability of the taxonomy in promoting sustainable economic activities and investments.