EU Taxonomy Regulation

What Is the EU Taxonomy?

The EU Taxonomy Regulation (2020/852) establishes a unified classification system for environmentally sustainable economic activities across the European Union. It provides technical criteria that determine whether a specific economic activity can be classified as 'green' — creating a common language for sustainable finance and corporate disclosure.

The Taxonomy is a cornerstone of the EU's sustainable finance framework, designed to direct capital toward genuinely sustainable activities and combat greenwashing.

Who It Applies To

• CSRD-reporting companies: Must disclose Taxonomy eligibility and alignment of revenue, capital expenditure, and operating expenditure
• Financial market participants: Must disclose Taxonomy alignment of financial products under SFDR
• EU member states: Must use the Taxonomy for green bonds and public measures
• Financial institutions: Must report the Green Asset Ratio (GAR) showing Taxonomy-aligned activities in their portfolios

Key Requirements

Three-step assessment:

1. Taxonomy eligibility: Is your economic activity described in the Taxonomy? Not all activities are covered — only those with significant potential for environmental contribution.

2. Substantial contribution: Does the activity meet the Technical Screening Criteria (TSC) for at least one environmental objective? For example, electricity generation from solar PV must have lifecycle emissions below 100g CO2e/kWh.

3. Do No Significant Harm (DNSH): Does the activity avoid significant harm to the other five environmental objectives? Each TSC includes specific DNSH criteria.

4. Minimum safeguards: Does the company comply with OECD Guidelines, UN Guiding Principles on Business and Human Rights, ILO core conventions, and the International Bill of Human Rights?

Reporting metrics:

• Taxonomy-eligible revenue, CapEx, and OpEx as a percentage of total
• Taxonomy-aligned revenue, CapEx, and OpEx as a percentage of total
• Breakdown by environmental objective

The Six Environmental Objectives

1. Climate change mitigation: Activities that reduce GHG emissions (renewable energy, energy efficiency, clean transport, green buildings)
2. Climate change adaptation: Activities that reduce vulnerability to climate impacts (climate-resilient infrastructure, warning systems)
3. Water and marine resources: Activities protecting aquatic ecosystems and water quality
4. Circular economy: Activities minimizing waste and keeping materials in use
5. Pollution prevention: Activities reducing pollution of air, water, and soil
6. Biodiversity: Activities protecting and restoring ecosystems

Timeline

• July 2020: Taxonomy Regulation entered into force
• January 2022: Climate Delegated Act applied (objectives 1 & 2)
• January 2024: Environmental Delegated Act applied (objectives 3-6)
• Ongoing: Technical screening criteria are periodically reviewed and updated

Compliance Steps

1. Map economic activities: Identify which of your revenue-generating activities, CapEx, and OpEx are described in the Taxonomy
2. Assess eligibility: Determine which mapped activities are Taxonomy-eligible
3. Evaluate substantial contribution: Test eligible activities against Technical Screening Criteria for the relevant environmental objective
4. Apply DNSH criteria: Verify that each substantially contributing activity does not significantly harm the other five objectives
5. Verify minimum safeguards: Confirm compliance with human rights, anti-corruption, tax, and competition requirements
6. Calculate KPIs: Compute Taxonomy-aligned percentages for revenue, CapEx, and OpEx
7. Disclose in management report: Include Taxonomy reporting as part of CSRD sustainability statement

Penalties

Penalties follow CSRD enforcement mechanisms as Taxonomy reporting is embedded in CSRD disclosure. Additionally:

• Misrepresentation of Taxonomy alignment could constitute greenwashing
• Financial institutions face regulatory scrutiny from national supervisors
• Investment funds claiming green credentials without proper Taxonomy assessment face SFDR enforcement

How Council Fire Can Help

Council Fire helps companies navigate the EU Taxonomy — from activity mapping and technical screening criteria assessment through DNSH analysis and KPI calculation. We make Taxonomy reporting practical and audit-ready. Contact us for EU Taxonomy support.