EU Taxonomy

EU’s taxonomy - what does this regulation mean?

The EU’s taxonomy (the taxonomy) means expanded requirements for what companies must include in their sustainability reporting. It includes additional needs for companies to conduct comprehensive technical and economic analyses that must be reported according to a set format.

Why is the taxonomy needed?

The need for taxonomy comes from the demand for access to information and for comparability regarding company activities and investments that are claimed to be sustainable. The taxonomy directive stipulates greater demands for transparency from companies and financial market participants regarding their business activities.

The taxonomy is a classification system that defines environmental and sustainable investments. It establishes an EU-wide, mutual understanding of what can be “classified as sustainable.” The taxonomy is an important component in helping investors and companies to direct capital towards solutions that support development and the transition to a climate-neutral and resilient society. 

What is the taxonomy?

The taxonomy contains environmental objectives described in more detail in the regulation, see the diagram below. These are linked to the EU’s action plan for the financing of sustainable growth.

The taxonomy is a dynamic regulation that has evolved via delegated acts since it came into force. This means that the EU can implement changes or complement the taxonomy with new requirements over time. There are currently four delegated acts: 

• Climate Delegated Act (CDA) which includes technical screening criteria for economic activities related to the environmental objectives, mitigation of climate change, and adaptation to climate change.
• Complimentary Climate Delegated Act (CCDA) which includes additions and amendments to the CDA.
• Environmental Delegated Act (EDA) which includes technical screening criteria for economic activities related to the remaining four environmental objectives.
• Disclosures Delegated Act (DDA) which includes disclosure obligations on how the report must be structured and presented, as well as timelines for companies and financial market participants.

These list the economic activities identified as vital to achieving environmental objectives. They contain descriptions of the eligible economic activities and the pertaining technical screening criteria that need to be achieved for the activities to be deemed compatible with the taxonomy, and thus classified as sustainable. Furthermore, they establish mandatory reporting templates and requirements for contextual information that must be included in the report.

Continued expansion of economic activities and sectors, as well as adaptation of the taxonomy is also expected going forward via new delegated acts. 

What does preparing a taxonomy report involve?

Companies and financial market participants need to conduct comprehensive analyses of their business activities for reporting under the taxonomy. This includes identifying which parts of the organization and which products and service offerings are eligible for the classification system. 

Once the taxonomy eligible economic activities have been identified, further analyses are required to understand whether these activities are compatible with the taxonomy (taxonomy aligned), i.e., whether they fulfil the technical screening criteria. These are defined from three perspectives:

• Criteria for making a substantial contribution to at least one of the six environmental objectives, and
• Criteria for doing no significant harm (DNSH) to any of the other environmental objectives, and
• Complying with minimum safeguards 

All screening criteria for a given economic activity must be fulfilled for it to be classified as sustainable, and thus aligned with the taxonomy. Finally, the taxonomy outcome is reported under three financial KPIs: turnover, CapEx, and OpEx. 

When was the taxonomy introduced?

The taxonomy regulation came into force in 2020, and reporting requirements regarding the taxonomy have been phased in, in conjunction with its continuous development. Initially the focus was on the climate-related objectives, and this was then followed by a gradual phasing in of the other four environmental objectives. 

From 2024, the companies and financial market participants affected must prepare complete reports in accordance with all six environmental objectives.

Which companies are subject to the taxonomy?

The taxonomy regulation refers to rules for companies’ non-financial reporting, in terms of those who are obliged to prepare a taxonomy report. This means that companies that are now subject to the CSRD also must report in accordance with the EU’s taxonomy. Previously, it was the NFRD that stipulated the reporting obligations. 

Similarly, the taxonomy regulation refers to the Sustainable Finance Disclosure Regulation (SFDR) regarding the obligations of financial market participants to report under the taxonomy. 

As both the CSRD and the SFDR have a phased implementation, this also impacts the rules regarding the taxonomy: 

Future development of the taxonomy

It is important that companies and financial market participants remain updated on the taxonomy to understand whether any changes imply new requirements for the organization. Amongst other things, FAQ documents are continuously published providing guidance and clarification regarding interpretation and application. 

Development of the taxonomy is managed by an established group of experts, the Platform for Sustainable Financing, appointed by the EU Commission. Their assignment is to advise the Commission and develop technical screening criteria and monitor the implementation and application of the taxonomy. 

Due to the EU’s taxonomy and new directives such as the CSRD and CSDDD, companies will have to deal with the significant challenge of creating structures and processes for their sustainability reporting. Our sustainability specialists and our global network have wide and extensive experience in sustainability issues and are knowledgeable about the new regulations. Some of the areas we can assist you with include:

• Devising a plan for how you can commence your sustainability reporting based on the new requirements.
• Supporting in the preparation of a taxonomy report, including identification of eligible economic activities and analyzing taxonomy alignment. 
• Helping to evaluate whether services and products can be classified as sustainable in accordance with the taxonomy. 
• Training and raising awareness of the new classification system within your organization.
• Examining how well your business activities are adapted to mitigate climate impact and how this can be measured.
• Getting you ready to respond to questions from institutional investors regarding taxonomy adaptations of investment products.
• Comparing your business results with those of your competitors in terms of environmental sustainability.
• Supporting asset managers in identifying whether investments fall within the scope of the taxonomy.