Impact Policy Tracker Policy

EU Taxonomy



Established by Regulation (EU) 2020/852 and effective from July 2020, the EU Taxonomy is the first comprehensive classification system for environmentally sustainable economic activities. It was developed to drive investments towards activities aligned with the European Climate Law mandating EU climate neutrality by 2050, as outlined in the European Green Deal. The Taxonomy covers activities contributing to 6 environmental objectives: 1) Climate change mitigation, 2) Climate change adaptation, 3) Sustainable use and protection of water and marine resources, 4)Transition to a circular economy, 5) Pollution prevention and control and 6) Protection and restoration of biodiversity and ecosystems.

To qualify as environmentally sustainable, an activity must: a) contribute substantially to at least one environmental objective, b) do no significant harm to any of the other objectives, c) comply with minimum social safeguards, and d) align with specific technical screening criteria. The framework was developed following the European Commission’s 2018 Action Plan on Financing Sustainable Growth and was informed by extensive consultations involving EU institutions, Member States, and a Technical Expert Group comprising representatives from civil society, academia, industry, and the financial sector.

Highlights

  • A Global Benchmark for Sustainable Finance Taxonomies: As the first comprehensive and legally binding framework of its kind, the EU Taxonomy has influenced the development of green taxonomies worldwide. Countries such as Colombia, South Africa, and the UK have used the EU Taxonomy’s structure and criteria as a reference to guide the development of their own taxonomy frameworks, adapting and expanding it to reflect their specific national contexts and priorities.

  • Integration with the CSRD: The EU Taxonomy operates in tandem with a broader set of regulatory frameworks aimed at directing capital towards sustainable activities, including the sustainability disclosure requirements. Article 8 of the Taxonomy requires companies under the scope of the Corporate Sustainability Reporting Directive (CSRD), to disclose the extent to which their activities align with the Taxonomy, with the goal of preventing greenwashing and increasing market transparency.

  • Reference point for sustainable financial products:The EU Taxonomy serves as a classification system for identifying “environmentally sustainable” economic activities and acts as a reference framework for labelling financial products. It underpins disclosure and product classification requirements under the Sustainable Finance Disclosure Regulation (SFDR), particularly for financial products falling under Articles 8 and 9, which promote environmental or social characteristics or have a sustainable investment objective, respectively. In parallel, the Taxonomy provides the eligibility criteria for the European Green Bond Standard (EU GBS), requiring that all proceeds raised by green bonds be allocated to Taxonomy-aligned activities.

Government’s Role:
Market Facilitator


Country:
European Union

Policy Type:
Sustainable Finance Taxonomies

Year: 2020

Responsible Institution:
European Parliament and European Council

Additional information:
PRI: Investor Briefing - EU Taxonomy

Sustainable Finance Taxonomies

What are Sustainable Finance Taxonomies?

Sustainable finance taxonomies provide a common language to classify and compare sustainable economic activities. They can be thought of as an encyclopaedia of sustainable activities: they list and define which sectors and actions qualify as sustainable based on specific criteria - either qualitative (e.g., social safeguards) or quantitative (e.g., emission thresholds). As such, taxonomies help assess whether activities align with sustainability standards and channel investments towards projects that support environmental and social objectives, while reducing the risk of greenwashing. As of July 2024, over 53 taxonomies have progressed worldwide, with 24 fully developed.

In practice, taxonomies are used by companies and investors to align portfolios, business activities, and financial products with sustainable objectives. Governments also use them to issue and enforce disclosure regulations, develop sustainability standards and labels, issue taxonomy-aligned bonds, and monitor progress on national and international commitments. While green taxonomies are the most widespread -focusing on activities that support environmental goals- there is growing interest in developing social taxonomies (e.g. the EU’s proposal to develop a Social Taxonomy), which aim to classify activities that promote social objectives such as human rights and equality.

For more information on taxonomies, visit SBFN Toolkit on Sustainable Finance Taxonomies (May, 2024), NATIXIS New Geography of Taxonomies (July, 2023) and PRI’s Implementation guide for sustainable investment policy and regulation tools: taxonomies of sustainable economic activities (June, 2022)