EU Taxonomy

What is the EU Taxonomy?

The EU Taxonomy is a unified classification system of the European Union that helps companies assess economic activities based on their ecological sustainability. Its purpose is to channel capital flows towards sustainable business models and create transparency in the market for green financial products. In doing so, it serves as a central instrument for the implementation of the European Green Deal.

At its core, the EU Taxonomy defines which activities can be considered environmentally sustainable. To qualify, an activity must make a substantial contribution to at least one of six defined environmental objectives, without significantly harming any of the other objectives. Additionally, social minimum standards – such as the OECD Guidelines for Multinational Enterprises – must be adhered to.

EU Taxonomy: Origins and Development

The foundation for the EU Taxonomy was laid in 2018 with the EU Action Plan "Financing Sustainable Growth," aimed at promoting sustainable financing. The actual regulation (EU) 2020/852 came into force in 2020 and was supplemented by delegated acts with technical screening criteria.

Since then, the Taxonomy has been gradually expanded. Currently, comprehensive technical criteria for the environmental objectives of climate change mitigation and adaptation are in place. The remaining four objectives – such as biodiversity protection or the transition to a circular economy – are being implemented. This dynamic legal framework is continually being refined to encompass new sectors and technologies.

EU Taxonomy: The Six Environmental Objectives at a Glance

An economic activity can only be considered taxonomy-compliant if it significantly contributes to at least one of the following environmental objectives: climate change mitigation, climate change adaptation, sustainable use of water and marine resources, the transition to a circular economy, pollution prevention, and the protection and restoration of biodiversity and ecosystems.

In addition to the positive impact, it must also be ensured that none of the other objectives are significantly harmed – the so-called “Do No Significant Harm” principle. Furthermore, social minimum standards must be adhered to in order to ensure a holistic sustainable impact.

Who is Affected by the EU Taxonomy?

Initially, the EU Taxonomy primarily affects large capital market-oriented companies with more than 500 employees. However, with the phased implementation of the Corporate Sustainability Reporting Directive (CSRD) starting in 2025, the scope will be significantly expanded.

Companies that exceed two of the following three thresholds will be required to report: more than 250 employees, more than 50 million euros in revenue, or more than 25 million euros in total assets. Also, publicly listed small and medium-sized enterprises (SMEs) and foreign companies with significant operations in the EU will be included. The timeline extends to 2028, affecting millions of organizations across Europe.

The Six Environmental Objectives of the EU Taxonomy

At the heart of the EU Taxonomy are six environmental objectives, by which economic activities are evaluated. An activity is considered sustainable if it significantly supports at least one of these objectives, without impairing any other objective.

1. Climate Change Mitigation: Activities that directly or indirectly reduce greenhouse gas emissions, such as renewable energy, energy efficiency, or low-carbon technologies.
2. Climate Change Adaptation: Measures that address risks arising from the effects of climate change, such as climate-resilient infrastructure, flood protection, or early warning systems.
3. Sustainable Use and Protection of Water and Marine Resources: Economic activities that ensure the sustainable management of freshwater, groundwater, or marine resources, such as water-saving technologies or coastal protection measures.
4. Transition to a Circular Economy, Waste Protection, and Recycling: Initiatives that promote resource efficiency, reuse, repair, recycling, or longer product life cycles, such as designing circular products or establishing secondary raw material markets.
5. Pollution Prevention and Control: Activities that contribute to reducing air, water, and soil pollution or replacing hazardous substances with less harmful alternatives.
6. Protection and Restoration of Biodiversity and Ecosystems: Measures aimed at conserving or restoring natural habitats, biodiversity, and ecological balances, such as sustainable land use or ecosystem restoration.

Reporting Requirements and KPIs

Central to the reporting are the share of taxonomy-eligible and taxonomy-compliant economic activities. Companies must report in their management report the percentage of these activities in their revenue, capital expenditures (CapEx), and operating expenses (OpEx).

These figures must be verifiable and reported according to the European Sustainability Reporting Standards (ESRS), with reference to the technical screening criteria. The goal is to enable investors and stakeholders to assess the ecological sustainability of corporate activities in a transparent and comparable manner.

Regulatory and Economic Importance of the EU Taxonomy

The EU Taxonomy is more than just a regulatory instrument. It is changing the way companies strategically integrate sustainability. Three overarching objectives are at the core: redirecting capital flows to sustainable investments, integrating sustainability into corporate risk management, and promoting long-term economic activity.

In addition, the Taxonomy provides the foundation for numerous complementary regulations, such as the EU Green Bond Standard or the Carbon Border Adjustment Mechanism (CBAM). It also affects financing, rating procedures, and investment decisions.

Implementation in Business Practice

For companies, the EU Taxonomy is both a challenge and an opportunity. Evaluating their activities requires new data flows, cross-departmental collaboration, and often the use of specialized software solutions.

Those who integrate the requirements early on will benefit from increased financial attractiveness, stronger market positioning, and a better understanding of their value creation in the context of sustainable development. The integration of digital tools ensuring transparency and traceability across the entire supply and transport chain will become an increasingly important success factor.

Conclusion

The EU Taxonomy brings clarity to what constitutes sustainable business practices – and firmly anchors ecological criteria in the financial and corporate context. Companies that view the associated requirements as a strategic opportunity can not only mitigate regulatory risks but also gain a real competitive advantage. Early adopters will not only be compliant but also well-positioned for the future.