What is the EU Taxonomy?

The EU Taxonomy Regulation, the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR) form the central pillars of the European framework for sustainable financial reporting. The aim of this framework is to create a consistent, reliable and comparable flow of information on ESG topics throughout the financial and corporate world. In this context, the EU Taxonomy provides a classification system to assess whether economic activities are ecologically sustainable and contribute to one or more environmental objectives. 

As such, it gives companies an objective basis of assessment, which enables standardised evaluation within the framework of sustainable finance – especially with regard to financing decisions and ESG ratings.

Since 2022, companies must report the extent to which their economic activities contribute to the following environmental objectives:

• Climate change mitigation
• Climate change adaptation

Since 2024, additional reporting requirements have been in place for four further environmental objectives:

• Sustainable use of water and marine resources
• Circular economy
• Prevention of environmental pollution
• Biodiversity protection

For an activity to be considered “Taxonomy-compliant”, it must fulfil three conditions:

• Substantially contribute to at least one of the six environmental objectives
• Do no significant harm (DNSH) to any of the other environmental objectives according to technical assessment criteria
• Comply with minimum social safeguards, including:
  o    OECD Guidelines for Multinational Enterprises 
  o    United Nations Guiding Principles on Business and Human Rights
  o    ILO core labour standards

Who is affected by the EU Taxonomy reporting obligation for companies?

Mandatory reporting based on the EU Taxonomy applies to:

1.    Companies that already fall under the CSR Directive Implementation Act (CSR-RUG) or the Corporate Sustainability Reporting Directive (CSRD)
2.    Financial market participants according to the Sustainable Finance Disclosure Regulation (SFDR)

This signifies that:

All large, capital market-oriented companies under the Corporate Sustainability Reporting Directive (CSRD) are already obliged to report on the proportion of their total turnover, capital expenditure (CapEx) and operating expenditure (OpEx) that is Taxonomy-eligible, and this will apply to all companies in future.

Financial market actors, too, such as banks, insurance companies and investment companies, must publish their product and company reporting in compliance with the Taxonomy.
The user group is currently being revised in the course of the so-called Omnibus Initiative. This initiative includes the revision of various EU legislative acts, among them the thresholds of the CSRD (employees, turnover, balance-sheet total), which will in future determine whether a company falls within the scope of the EU Taxonomy.

Furthermore, the Omnibus package allows for targeted measures to simplify and streamline the use of the EU Taxonomy itself. The aim is to reduce the administrative overhead, particularly for small and medium-sized enterprises who have to report for the first time, and make applying the Taxonomy criteria easier.

When does the EU Taxonomy come into effect?

The EU Taxonomy Regulation was published on 12 July 2020, with phased application for mandatory reports from 1 January 2022. The introduction of the CSRD will expand the group of affected users. Because of the EU’s Omnibus process, the deadlines for companies in the second and third implementation waves are likely to change as well. The so-called “Stop-the-clock” Directive, however, does not explicitly refer to the EU Taxonomy – unlike in, say, the case of the CSRD or CSDDD. In this context, therefore, we should advise of possible changes to the EU Taxonomy Regulation that could arise in the course of the Omnibus process.

The following links offer further support.