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Overview

The Taxonomy Regulation was proposed as part of the EU Action Plan on Financing Sustainable Growth (COM(2018) 97 final), which aims to redirect capital flows toward a more sustainable economy. It differs from other sustainability reporting mandates, such as the NFRD and the CSRD, first because it provides a classification system to define which economic activities qualify as environmentally sustainable and second because it requires companies to report on their activities based on this classification.

Scope

The Taxonomy Regulation applies to

• policy measures targeting sustainable financing activities,

• financial market participants within the scope of the SFDR and

• companies subject to the NFRD and the CSRD

Environmental objectives

The classification of the Taxonomy Regulation is organized around the following six environmental objectives:

1. climate change mitigation,

2. climate change adaptation,

3. the sustainable use and protection of water and marine resources,

4. the transition to a circular economy,

5. pollution prevention and control, and

6. the protection and restoration of biodiversity and ecosystems.

 

Each environmental objective is defined in Article 9 and delineated in greater detail in Articles 10-15 of the regulation.

Conditions for economic activities

The Taxonomy Regulation defines three conditions that an economic activity must meet to qualify as environmentally sustainable, also referred to as ‘taxonomy-aligned’:

1. the activity must substantially contribute to meeting at least one of the six environmental objectives (SC criteria),

2. the activity does not significantly harm meeting any of the six environmental objectives (DNSH criteria), and 

3. the activity is carried out in compliance with minimum safeguards.

 

These conditions are further delineated in Articles 16-18 of the regulation.

The technical screening criteria that an economic activity must meet for the SC and the DNSH criteria are defined in delegated regulations for:

• climate change mitigation (Annex I) and climate change adaptation (Annex II) (Commission Delegated Regulation (EU) 2021/2139)¹

• the sustainable use and protection of water and marine resources (Annex I), the transition to a circular economy (Annex II), pollution prevention and control (Annex III), and the protection and restoration of biodiversity and ecosystems (Annex IV) (Commission Delegated Regulation (EU) 2023/2486).

A separate delegated regulation (Commission Delegated Regulation (EU) 2022/1214) was adopted to define criteria for fossil gas and nuclear energy sectors.

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^{1 An amendment of the delegated regulation was adopted in June 2023 to account for further economic activities related to those two environmental objectives (Commission Delegated Regulation (EU) 2023/2485).}

Disclosure requirements

The Taxonomy Regulation distinguishes between taxonomy-eligible and taxonomy-aligned economic activities. An economic activity is taxonomy eligible if it is listed in the annexes of the delegated regulations that define the technical screening criteria. Taxonomy alignment further requires adherence to the SC and DNSH criteria and the minimum safeguards.

The minimum safeguards require that activities are, for example, aligned with the OECD Guidelines for Multinational Enterprises, and the UN Guiding Principles on Business and Human Rights must be ensured.

• Nonfinancial companies must disclose the proportion of ...

  • their turnover,

  • capital expenditures (capex) and

  • operating expenditures (opex)

           ... associated with environmentally sustainable activities.

• Further information needs to be provided on the description and classification of the economic activities, the composition of the numerators and denominators of the KPIs, the link to the financial reporting, the comparison with previous years’ KPIs, and on how double counting is avoided.

• Financial companies must report KPIs that reflect their financing, investment, and insurance activities towards environmentally sustainable activities and certain qualitative information to facilitate understanding of the reported KPIs.

Reporting format

The content and presentation of the information is further specified in a delegated regulation (Commission Delegated Regulation (EU) 2021/2178).²

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^{2 An amendment of the delegated act was adopted in June 2023 to define the disclosure requirements for additional activities related to environmental objectives 1 and 2 (see footnote 1) as well as for the environmental objectives 3 to 6 (Commission Delegated Regulation (EU) 2023/2486).}

Links and sources

• European Commission, EU Taxonomy Navigator (compass, calculator, FAQs, user guide)

• Hummel, K., Jobst, D., 2024. An Overview of Corporate Sustainability Reporting Legislation in the European Union. Accounting in Europe. DOI: 10.1080/17449480.2024.2312145

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