As the linchpin of the European Union’s Green Deal, the EU Taxonomy has been developed to define and standardise what qualifies as a sustainable economic activity.
According to Greenomy, this classification system aims to enhance market transparency and uniformity, steering businesses and investors towards eco-friendly and responsible operations. Understanding this framework is crucial for entities seeking to leverage opportunities such as access to green financing, gaining competitive edges, and boosting their brand by contributing to a low-carbon economy transition.
The EU Taxonomy is a detailed classification framework that determines if an economic activity is environmentally sustainable, enabling both non-financial and financial stakeholders to assess, calculate, and compare their sustainability performances.
It offers science-based criteria for sustainable alignment and establishes a universal language that is applicable across various sectors and industries.
The primary aim of the EU Taxonomy is to weave Environmental, Social, and Governance (ESG) factors into the broader business strategies of organisations. This integration helps companies define, pursue, and communicate clear, measurable sustainability goals.
By illuminating financial risks and enabling informed decision-making, the taxonomy also plays a critical role in curbing ‘greenwashing’, where companies falsely advertise themselves as environmentally friendly.
As Sustainability Expert Quentin Hennaux mentioned in his interview about EU Taxonomy Reporting, “Any company can say they are sustainable, but the EU Taxonomy intends to provide stakeholders with appropriate definitions for which activities can be considered environmentally sustainable thanks to science-based criteria.”
The development of the EU Taxonomy is part of the EU’s Action Plan for Sustainable Finance and aligns with the Sustainable Finance policy initiatives under the EU Green Deal. These initiatives aim to redirect capital flows towards sustainable investments, supporting the EU’s commitment to achieving carbon neutrality by 2050, as stipulated in the 2016 Paris Agreement.
The EU Taxonomy applies to all non-financial corporations previously covered under the EU Non-Financial Reporting Directive (NFRD), which needed to adhere to this framework starting in 2022. This includes listed companies with over 500 employees and those meeting certain financial thresholds, such as having a balance sheet over €25m or a net turnover exceeding €50m.
The EU Taxonomy is gradually being implemented. The timeline extends from simplified reporting requirements for FY 2021 to a more comprehensive inclusion of new environmental objectives by 2025, and broadening the scope to include non-EU companies and listed SMEs by 2029.
EU Taxonomy reporting begins with assessing the eligibility of an organisation’s activities, primarily by understanding the applicable NACE code. This assessment helps identify relevant activities and measure the turnover, CapEx, and OpEx linked to these activities. The process continues with aligning these activities against the Technical Screening Criteria (TSC) of the EU Taxonomy.
The EU sustainable finance framework encompasses the EU Taxonomy, Corporate Sustainability Reporting Directive (CSRD), and Sustainable Finance Disclosure Regulation (SFDR), all working in concert to steer investments towards Taxonomy-aligned activities.
Adhering to the EU Taxonomy poses various challenges, including the complexity of the standard, the need for significant data management, and the costs associated with initial compliance. Solutions like investing in training, using ESG reporting software, and consulting with experts can mitigate these challenges and facilitate a smoother compliance process.
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