EU taxonomy: How to do adapt to the regulatory framework

The EU taxonomy has played a crucial role in the transition towards a more sustainable and environmentally aware economy.

This regulatory framework has had a significant impact on companies and investors alike, who are now looking to adapt to it and take advantage of the opportunities it offers.

In this article, we’ll explore the goals, scope and applications of the EU taxonomy, as well as its benefits and drawbacks.

We’ll also analyse how this classification scheme can be a catalyst for sustainable transformation.

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What is the EU taxonomy?

The EU taxonomy is a classification system devised by the European Union (EU) to determine whether an economic activity can be considered “sustainable” or “green”.

This tool was created with the goal of facilitating and increasing sustainable investment and eliminating greenwashing, a business practice in which companies provide deceitful or false information regarding the sustainability of their products or services.

The EU taxonomy was put in place by Regulation (EU) 2020/852, known as the Taxonomy Regulation, and it has turned into one of the most important instruments for regulating non-financial information disclosure requirements.

Companies bound by this regulation are compelled to disclose the measures they take on matters relating to the environment, their social impact and governance (ESG).

Since it came into force in July 2020, this framework has undergone several updates and modifications, which has made it difficult for many companies and investors to keep track of the regulations. So, in this article we provide a thorough overview of what the EU taxonomy for sustainable activities is and what it means.

Goals and scope of the EU taxonomy

The main aims of the EU taxonomy are to help companies and investors navigate the transition towards a more sustainable European economic model, in line with high-level political commitments such as the Paris Agreement and the European Green Deal.

In addition, it hopes to provide a shared framework reference that makes it easier to assess and compare sustainable activities across different sectors and regions.

Two main users are covered by the scope of the EU taxonomy: the European Union and its member states on one hand, and participants in the financial markets on the other. It directly impacts companies that need to adapt to the criteria set by the EU.

Investors are also affected, particularly those looking for sustainable investment opportunities.

EU taxonomy application timeline

The EU taxonomy has been developed and will come into effect for both companies and financial institutions according to a specific timeline. Below we’ll take an in-depth look at the key dates and deadlines for mandatory disclosure.

Developmental timeline of the regulation

2022: Application of the Delegated Climate Act.
2022: Completion of the Complementary Climate Delegated Act and its publication in the official journal. Its implementation has been delayed by a year.
Pending: Formal approval of the EU Platform on Sustainable Finance’s final report as a delegated act. From January 2023, financial entities must begin disclosing their eligibility report.

Timeline of disclosure requirements

Here is a table showing the key dates and requirements for disclosure.

When	Who	What
January 2023	Large listed companies with > 500 employees	Report eligibility and alignment for the previous calendar year. Financial entities report eligibility for 2022.
January 2024	Large listed companies with > 500 employees	Report eligibility and alignment for the previous calendar year. Financial entities report eligibility and alignment for 2023.
January 2025	Large listed companies with > 500 employees	Financial entities may include estimates on alignment for DNSH (“do no significant harm”) assessments of third-country exposures subject to 2024 review period.
January 2026	All large companies with > 250 employees	Credit institutions include alignment of their trading book and fees and commissions for non-banking activities, which are reported under the Corporate Sustainability Reporting Directive (CSRD) and the taxonomy.
January 2027	All listed companies, including SMEs	SMEs will report according to a simplified CSRD and taxonomy standard.

How to apply the EU taxonomy

The regulation deems an activity to be sustainable if it meets the following six environmental objectives:

Climate change mitigation.
Climate change adaptation.
The sustainable use and protection of water and marine resources.
The transition to a circular economy.
Pollution prevention and control.
The protection and restoration of biodiversity and ecosystems.

Other considerations in line with the above objectives that must be taken into consideration are:

Contribute to at least one of the six environmental objectives listed above.
Do no significant harm (DNSH principle) to other environmental objectives, while respecting basic human rights and labour laws.
Meet the minimum social safeguards and not have a negative social impact.
Meet the technical screening criteria of the EU’s Technical Expert Group (TEG), which specifies the performance requirements for points 1 and 2.

Companies will have to demonstrate that they meet the technical requirements for each environmental objective.

Criteria for 70 mitigation activities and 64 adaptation activities have been established, grouped into three main categories: low-carbon, transitional and enabling. For each objective, the TEG has come up with thresholds to help determine whether or not an activity complies with the DNSH principle.

These allow companies to holistically and accurately assess their impact regarding the objective they aim to achieve. In sum, they have simple guidelines that will help them take suitable measures for their needs.

Benefits of applying the EU taxonomy for companies

The main advantage is that they will have a legal framework for improving their business and making it sustainable. It gives them a series of objectives to implement, allowing them to achieve real change and clearly demonstrate their commitment to their natural environment.

Meanwhile, companies can also attract investors that are concerned about sustainability. This enables them to obtain capital from new, more diversified sources, which in turn contributes to improving and growing the business.

They are also able to improve their internal organisation, as the indications for the criteria used in the taxonomy simplify decision-making and planning, while preventing risks and providing the means to make the most of the opportunities presented to them.

Frequently asked questions about the EU taxonomy

What is “do no significant harm” (DNSH) in the EU taxonomy?

«Do no significant harm» (DNSH) is a key principle which states that sustainable economic activities must not cause significant harm to other environmental objectives.

In other words, an economic activity cannot be considered sustainable if it has a significant negative impact on other environmental aspects, even if it helps mitigate climate change.

What is “green” in the EU taxonomy?

This refers to economic activities that meet specific criteria and contribute significantly to the European Union’s environmental objectives, such as climate change mitigation and adaptation, the protection of ecosystems and biodiversity, and the transition to a circular economy, among others.

What are eligibility and alignment with regard to the taxonomy?

Eligibility and alignment refer to the degree to which a company or investment fund’s economic activities meet the criteria set by the taxonomy.

Eligibility is the assessment of whether a specific economic activity is included in the taxonomy and if it meets the technical screening criteria and defined thresholds in order to be considered a sustainable activity.

What eligibility really comes down to is whether an economic activity significantly contributes to one or more of the environmental objectives that have been set.

Alignment, on the other hand, refers to the proportion of a company’s economic activities, revenue, capital expenditure (CapEx) and operating expenditure (OpEx) that are aligned with the EU taxonomy’s criteria and thresholds.

This is a way to help companies and investors understand what percentage of their activities or investments are really contributing to environmental and sustainability objectives. It also gives us an idea of how much progress is being made towards the transition to a more sustainable and low-carbon economy.

What’s the different between the EU taxonomy and the TCFD?

The taxonomy and the TCFD (Task Force on Climate-related Financial Disclosures) are essentially two different approaches to sustainability and disclosing information in the finance and business world.

Both focuses aim to increase transparency and promote sustainable practices, but the taxonomy applies specifically to the European Union and centres around technical criteria, while the TCFD has a global reach and concentrates on disclosing risks and opportunities.

What’s the different between the EU taxonomy and the SFDR?

The taxonomy and the SFDR (Sustainable Finance Disclosure Regulation) complement one another, although they both deal with different aspects of sustainability within the financial sector.

The former is concerned with classifying economic activities based on their sustainability, while the SFDR concentrates on the disclosure of information regarding how financial institutions tackle sustainability in their operations and financial products. Both frameworks work side by side to improve transparency and boost sustainable investment in the European Union.

What are the current limitations of the taxonomy?

The current regulation only has technical screening criteria for two of the six environmental objectives.

What’s more, it only covers 13 sectors, and some important industries, such as agriculture, are not contemplated at the moment.

These uncovered sectors have little or no incentives to report using this framework. This limits the impact that these regulations can have in the short term.

Conclusions

By implementing and adopting the EU taxonomy, companies and the financial sector as a whole can considerably speed up the transition towards a low-carbon and sustainable economy.

In addition, it offers numerous benefits to companies, which is why in addition to being vital for guaranteeing a sustainable future and meeting the EU’s climate and environmental objectives, this regulatory framework will also ensure organisations’ long-term viability.

If you want to create reports in line with the EU taxonomy’s requirements and analyse your company’s sustainability data with ease, APLANET’s ESG data management tool can help you. Contact us now or book a free demo on our website!

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