The EU Taxonomy: A Comprehensive Guide to Sustainable Finance

The European Union (EU) Taxonomy is a classification system established to provide a common framework for determining the environmental sustainability of economic activities. As a cornerstone of the EU's sustainable finance framework, it plays a crucial role in the EU's efforts to achieve its ambitious climate and environmental objectives, including the goal of becoming climate-neutral by 2050¹. This report provides a detailed overview of the EU Taxonomy, its key features, benefits, criticisms, and practical applications. It is essentially a tool to help investors, companies, issuers, and project promoters navigate the transition to a low-carbon, resilient, and resource-efficient economy². Furthermore, the EU Taxonomy is not merely a set of rules but a driving force in the transition to a sustainable economy by promoting a transition to a zero-carbon future and guiding funding towards solutions that address the climate crisis³.

What is the EU Taxonomy?

The EU Taxonomy plays a vital role in the EU's sustainable finance strategy by promoting transparency and providing a common framework for assessing environmental sustainability⁴. It aims to prevent greenwashing and help investors make informed sustainable investment decisions⁵. The Taxonomy provides science-based assessment criteria for determining sustainable alignment and creates a common language that can be used across sectors and industries⁶.

Officially, the EU Taxonomy is defined as "a classification system that defines criteria for economic activities that are aligned with a net zero trajectory by 2050 and the broader environmental goals other than climate." ¹ It directs investments towards sustainable projects and activities in line with the European Green Deal objectives¹.

The EU Taxonomy is not a mandatory list of investments, nor does it set mandatory environmental performance requirements for companies or financial products³. However, it is expected to encourage a transition towards sustainability to achieve the EU's climate and environmental goals³.

Key Features of the EU Taxonomy

The EU Taxonomy has several key features that contribute to its effectiveness in promoting sustainable finance:

• Science-based Criteria: The Taxonomy uses science-based criteria to assess the environmental sustainability of economic activities. This ensures that the classification is objective and credible⁶.
• Comprehensive Scope: The Taxonomy covers a wide range of economic activities across various sectors. This ensures that the framework is relevant to a broad spectrum of investors and businesses¹.
• Transparency and Comparability: The Taxonomy promotes transparency by providing a standardized framework for reporting on the environmental sustainability of investments and economic activities. This allows investors and other stakeholders to compare the sustainability performance of different companies and projects⁶.
• Dynamic Framework: The Taxonomy is a dynamic framework that is regularly updated to reflect the latest scientific knowledge and technological advancements. This ensures that the classification system remains relevant and effective in promoting sustainable finance⁷.
• Common Language: The Taxonomy creates a common language for talking about sustainability and uses objective, quantifiable criteria for assessing businesses. This levels the playing field in sustainable finance by providing clear definitions and standardized practices⁸.

Six Environmental Objectives

The EU Taxonomy focuses on six environmental objectives. To be considered environmentally sustainable under the EU Taxonomy, an economic activity must make a substantial contribution to at least one of these objectives, while not significantly harming any of the others, and meet minimum social safeguards, including compliance with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights⁸. In addition, an economic activity must meet four overarching conditions to qualify as environmentally sustainable: ¹

1. It contributes substantially to one of the six environmental objectives.
2. It does no significant harm to any of the other environmental objectives (the “do no significant harm” criterion).
3. It complies with minimum social safeguards.
4. It complies with technical screening criteria.

| Objective | Description |

Works cited

1. EU taxonomy for sustainable activities - European Commission, accessed January 5, 2025, https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en
2. What is the EU Taxonomy? - Worldfavor Sustainability Blog, accessed January 5, 2025, https://blog.worldfavor.com/what-is-the-eu-taxonomy
3. EU Taxonomy Navigator - European Commission, accessed January 5, 2025, https://ec.europa.eu/sustainable-finance-taxonomy/
4. finance.ec.europa.eu, accessed January 5, 2025, https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en#:~:text=The%20EU%20taxonomy%20is%20a,the%20European%20Green%20Deal%20objectives.
5. EU taxonomy for sustainable activities - Wikipedia, accessed January 5, 2025, https://en.wikipedia.org/wiki/EU_taxonomy_for_sustainable_activities
6. The Essentials of EU Taxonomy for Companies - Greenomy, accessed January 5, 2025, https://www.greenomy.io/blog/the-essentials-of-the-eu-taxonomy-a-guide-to-accelerate-your-green-transition
7. EU Taxonomy for Sustainable Activities | EASA - European Union, accessed January 5, 2025, https://www.easa.europa.eu/en/domains/environment/policy-support-and-research/eu-taxonomy-sustainable-activities
8. An Introduction to the EU Taxonomy - Workiva, accessed January 5, 2025, https://www.workiva.com/resources/introduction-eu-taxonomy