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The EU Taxonomy became part of the EU Green Deal in an attempt to achieve climate neutrality by 2050 by directing capital and investments toward sustainable projects.
The EU Taxonomy sets the exact criteria for determining the sustainability of economic activities based on six environmental objectives. Let’s see how you can get started with EU Taxonomy alignment to promote transparency and ensure reliable sustainability claims.
What is EU taxonomy? + EU Taxonomy timeline
The EU Taxonomy is a classification system that helps investors choose sustainable activities and support the European Union’s climate and environmental goals. It provides a science-based framework for identifying economic activities that substantially contribute to sustainability objectives while avoiding significant harm to others.
Looking at the EU Taxonomy timeline, here are the most significant key developments:
The Climate Delegated Act
Published: 9 December 2021
Applicable since: January 2022
This act sets the technical screening criteria for economic activities that impact climate change mitigation and adaptation. It also includes safeguards to ensure these activities don’t significantly harm other environmental objectives (DNSH).
The Complementary Climate Delegated Act (CCDA)
Published: 15 July 2022
Applicable since: January 2023
The CCDA came in to extend the existing EU Taxonomy by including specific nuclear and gas energy activities (provided they meet strict conditions), broadening its application to a wider range of energy sources.
The Environmental Delegated Act (EDA)
Published: 21 November 2023
Applicable since: January 2024
This act expands the EU Taxonomy framework to technical criteria for the other four environmental objectives. This completes the scope of the taxonomy’s sustainability focus.
Amendments to the Climate Delegated Act
Published: 21 November 2023
Applicable since: January 2024
These amendments refine the criteria for climate change mitigation and adaptation, ensuring they stay up-to-date with scientific advances and market conditions. The adjustments aim to enhance the taxonomy’s practicality for corporate reporting and compliance.
Who needs to comply with EU Taxonomy?
While the CSRD (Corporate Sustainability Reporting Directive) requires large companies to report using the EU Taxonomy regulation, any company that needs to report under the CSRD also needs to comply with the EU Taxonomy. So, who does the EU Taxonomy apply to?
1. Large EU companies
Meeting at least two of the following three criteria:
- An average number of 250 employees (for a single fiscal year)
- Over €40 million in sales
- More than €20 million in total assets
2. Publicly listed companies on EU-regulated markets
Small and medium businesses (without micro-enterprises) that meet at least two of the following criteria:
- A balance sheet total of €4 million
- Net sales above €8 million
- An average of 50 employees (for one fiscal year)
3. Non-EU companies
With a net turnover of more than €150 million (in the EU), having at least one subsidiary or branch that brings in over €40 million (in the EU).
4. Parent or subsidiary companies of large groups
Meeting at least two of the following three criteria:
- An average number of employees standing at 250 employees (during one fiscal year)
- More than €40 million in turnover
- More than €20 million in total assets
EU Taxonomy reporting requirements
We sat down with Jagoda Kusmierek, Sustainability Reporting Specialist at ESG Flo, to fully grasp the extent of reporting requirements under the EU Taxonomy. These include:
Eligibility disclosure
You’ll have to report on the eligibility of your activities for all six environmental objectives:
climate change mitigation, adaptation, water, circular economy, pollution, and biodiversity.
Alignment disclosure
Reporting should align with climate change mitigation and adaptation only, as the criteria for these two objectives are already active. Alignment reporting for the other four objectives won’t be required until 2026.
Jagoda further stresses that in 2025, reports will include eligibility for all six environmental objectives and alignment for the first two objectives (climate change mitigation and adaptation) only.
How to comply with EU Taxonomy reporting
To comply with EU Taxonomy reporting, follow this five-step plan:
STEP 1: Determine eligibility (“Taxonomy-eligible activities”)
Jagoda Kusmierek notes that the very first step for a company is to assess which activities are covered by the EU Taxonomy. The main question to ask here is: Which of the activities performed by my company are eligible under the EU Taxonomy?
Eligibility refers to economic activities that could contribute to the Taxonomy’s environmental objectives (e.g. climate change mitigation, water protection, circular economy).
To determine eligibility, you can cross-check activities with NACE code and Delegated Acts or identify economic activities eligible under the EU Taxonomy. For the latter, assess operations against criteria for substantial contribution to environmental objectives, compliance with "Do no significant harm" principles, and alignment with minimum social safeguards, using tools like the EU Taxonomy Compass.
STEP 2: Assess if activities meet the technical screening criteria (“Taxonomy-aligned activities”)
The next step is to evaluate whether the eligible activities comply with the TSC set out in the Taxonomy. Activities must meet TSC for substantial contribution to one of the six environmental objectives.
STEP 3: Assess the ‘Do no significant harm’ (DNSH) criteria
Once you’ve assessed the substantial contribution, you need to check whether the activity harms other environmental objectives to which it does not contribute substantially.
The activity must comply with the DNSH criteria for all objectives it does not contribute to substantially. You can find the DNSH criteria in the Climate Delegated Act (Annexes I & II) and the Environmental Delegated Act (Annexes I-IV).
STEP 4: Assess compliance with the Minimum Safeguards
The Minimum Safeguards ensure that activities align with international standards on human rights, labor, and governance. These safeguards are aligned with guidelines such as the OECD Guidelines for Multinational Enterprises, UN Guiding Principles on Business and Human Rights, and the International Bill of Human Rights.
On this Jagoda further stresses that "activities must meet these social and governance standards, ensuring that they do not cause harm in terms of human rights, anti-corruption, or labor practices."
STEP 5: Calculate and report KPIs
After assessing eligibility, alignment, and safeguards, the company must calculate specific KPIs based on its taxonomy-eligible and aligned activities and disclose them in the sustainability statement. KPIs to consider include net turnover, capital expenditures (CapEx), and operating expenditures (OpEx) related to the aligned activities.
Final word
ESG Flo can help companies that need to follow the EU Taxonomy apply all of these steps. Get a free demo to learn more!
