What is the EU Taxonomy?

The EU Taxonomy is established by Regulation (EU) 2020/852, commonly referred to as the Taxonomy Regulation. It entered into force on 12 July 2020 and forms part of the EU's broader sustainable finance legislative package alongside the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD).

The Regulation empowers the European Commission to adopt Delegated Acts that define the technical screening criteria for each environmental objective. These criteria determine whether an activity makes a substantial contribution to an objective and whether it does no significant harm to the remaining objectives.

Technical screening criteria (TSC) are the quantitative and qualitative performance benchmarks that define what it means for an activity to make a substantial contribution to an environmental objective and to do no significant harm to the others. They are set out in the Delegated Acts and are specific to each economic activity.

For climate change mitigation, examples include a threshold of less than 100 gCO2e/kWh for electricity generation, a minimum 30% primary energy demand reduction for building renovation, and zero direct (tailpipe) emissions for vehicles. For adaptation, the criteria require a climate risk and vulnerability assessment (CRVA) following the methodology in Appendix A of the Climate Delegated Act.

The criteria are designed to be technology-neutral - any activity that meets the performance threshold qualifies, regardless of the specific technology used. They are subject to periodic review by the Platform on Sustainable Finance to ensure they remain aligned with scientific developments and the EU's evolving policy targets.

Taxonomy reporting obligations apply to companies and financial institutions that fall within the scope of the Corporate Sustainability Reporting Directive (CSRD). This includes large EU companies meeting at least two of three thresholds: more than 250 employees, more than EUR 50 million in net turnover, or more than EUR 25 million in total assets. Listed SMEs are also in scope, though with simplified requirements and a later phase-in.

Financial market participants - including banks, insurance companies, and asset managers - must disclose the taxonomy alignment of their products and portfolios under both the Taxonomy Regulation and the SFDR. Banks report their Green Asset Ratio (GAR), while asset managers disclose taxonomy alignment at the fund level.

The Taxonomy recognises that not all sustainable activities directly reduce emissions or improve the environment themselves. Enabling activities are those that allow other activities to make a substantial contribution. For example, manufacturing wind turbine components is an enabling activity for renewable energy generation.

Transitional activities are permitted only under the climate change mitigation objective. These are activities in sectors where low-carbon alternatives are not yet technologically or economically feasible, but where performance is substantially better than the industry average. Transitional activities must not lock in carbon-intensive assets and must not impede the development of lower-carbon alternatives. Their inclusion is time-limited and subject to review.

The Taxonomy does not exist in isolation - it is deeply integrated with two other pillars of the EU's sustainable finance framework. The Corporate Sustainability Reporting Directive (CSRD) requires in-scope companies to disclose their taxonomy-eligible and taxonomy-aligned economic activities as part of their annual sustainability statement. The Taxonomy provides the classification system; the CSRD provides the reporting framework.

The Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants to disclose how their products consider sustainability risks and whether they promote environmental characteristics (Article 8) or have sustainable investment as their objective (Article 9). Products marketed under SFDR must disclose the proportion of their investments that are taxonomy-aligned, creating a direct link between corporate reporting and financial product labelling.

Together, these three regulations create a feedback loop: companies report their taxonomy alignment under CSRD, financial institutions use that data to calculate their own taxonomy metrics, and investors can compare products based on standardised SFDR disclosures. This integrated system is designed to progressively redirect capital flows toward environmentally sustainable activities.