Why do we need an EU taxonomy?
In order to meet the EU’s climate and energy targets for 2030 and reach the objectives of the European green deal, it is vital that we direct investments towards sustainable projects and activities. The current COVID-19 pandemic has reinforced the need to redirect money towards sustainable projects in order to make our economies, businesses and societies – in particular health systems, more resilient against climate and environmental shocks.
To achieve this, a common language and a clear definition of what is ‘sustainable’ is needed. This is why the action plan on financing sustainable growth called for the creation of a common classification system for sustainable economic activities, or an “EU taxonomy”.
What is the EU taxonomy?
The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. It could play an important role helping the EU scale up sustainable investment and implement the European green deal. The EU taxonomy would provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable. In this way, it should create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments where they are most needed.
Taxonomy Regulation and delegated acts
The Taxonomy Regulation was published in the Official Journal of the European Union on 22 June 2020 and entered into force on 12 July 2020. It establishes the basis for the EU taxonomy by setting out 4 overarching conditions that an economic activity has to meet in order to qualify as environmentally sustainable.
The Taxonomy Regulation establishes 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
Different means can be required for an activity to make a substantial contribution to each objective.
Under the Taxonomy Regulation, the Commission had to come up with the actual list of environmentally sustainable activities by defining technical screening criteria for each environmental objective through delegated acts.
A first delegated act on sustainable activities for climate change adaptation and mitigation objectives was published in the Official Journal on 9 December 2021 and is applicable since January 2022. A second delegated act for the remaining objectives will be published in 2022.
The publication of the first delegated act was accompanied by the adoption of a Commission Communication on ‘EU taxonomy, corporate sustainability reporting, sustainability preferences and fiduciary duties: Directing finance towards the European green deal’ that aimed at delivering key messages on how the sustainable finance toolbox facilitates access to finance for the transition. This Communication builds on the transition finance report adopted by the Platform on Sustainable Finance in March 2021.
A Delegated Act supplementing Article 8 of the Taxonomy Regulation was published in the Official Journal on 10 December 2021 and is applicable since January 2022. This delegated act specifies the content, methodology and presentation of information to be disclosed by financial and non-financial undertakings concerning the proportion of environmentally sustainable economic activities in their business, investments or lending activities.
On 9 March 2022, the Commission adopted a Complementary Climate Delegated Act including, under strict conditions, specific nuclear and gas energy activities in the list of economic activities covered by the EU taxonomy. It was published in the Official Journal on 15 July 2022 and will apply as of January 2023. The criteria for the specific gas and nuclear activities are in line with EU climate and environmental objectives and will help accelerate the shift from solid or liquid fossil fuels, including coal, towards a climate-neutral future. The complementary delegated act builds on the Commission Communication referred to above and on the assessment of nuclear energy mentioned below.
Assessment of nuclear energy
Following the political agreement on the Taxonomy Regulation between co-legislators, in 2020 the Commission launched in-depth work to assess whether or not to include nuclear energy in the EU taxonomy of environmentally sustainable activities. As the first step, the Joint Research Centre, the in-house science and knowledge service of the Commission, drafted a technical report on the ‘do no significant harm’ aspects of nuclear energy. This publication is a Science for Policy report by the JRC, which aims to provide evidence-based scientific support to the European policymaking process. The scientific report does not imply a policy position of the European Commission. This report has been reviewed by two sets of experts, the Group of Experts on radiation protection and waste management under Article 31 of the Euratom Treaty, as well as the Scientific Committee on Health, Environmental and Emerging Risks on environmental impacts. Their reviews are available below. These three inputs will inform the Commission’s decision making.
The Commission created an IT tool – the taxonomy compass – that will facilitate the use of the taxonomy by allowing users to navigate easily through its contents.
Further development: the Platform on sustainable finance
The development of the EU taxonomy relies on extensive input from experts from across the economy and civil society. This is why the Platform on sustainable finance is tasked with advising the European Commission on further developing the EU taxonomy, improving its usability and exploring its expansion to social objectives, activities that significantly harm the environment or activities that are neutral towards the environment.
The Platform on sustainable finance is a permanent Commission expert group that has been established under the Taxonomy Regulation.
Preparatory work: Final report of the TEG
In order to inform its work on the action plan, including on the EU taxonomy, the European Commission established a Technical Expert Group (TEG) on sustainable finance in July 2018.
Within the framework of the Taxonomy Regulation, the TEG was asked to develop recommendations for technical screening criteria for economic activities that can make a substantial contribution to climate change mitigation and adaptation, while avoiding significant harm to the four other environmental objectives (sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention control, and protection and restoration of biodiversity and ecosystems).
On 9 March 2020, the TEG published its final report on EU taxonomy. The report contains recommendations relating to the overarching design of the EU taxonomy, as well as extensive implementation guidance on how companies and financial institutions can use and disclose against the EU taxonomy. The report is supplemented by a technical annex containing
- Updated technical screening criteria for 70 climate change mitigation and 68 climate change adaptation activities, including criteria for do no significant harm to other environmental objectives
- An updated methodology section to support the recommendations on the technical screening criteria
The TEG has also prepared excel tools to help users of the Taxonomy to implement it in their own activities.
This report builds on the work that the TEG published in June 2019 and the early feedback report published in December 2018. Both reports were subject to an open call for feedback to gather views from stakeholders. The responses authorised for publication can be found below:
- responses on the first call for feedback
- responses to the second round of feedback on the June 2019 report
In order to respond to the most frequently asked questions by stakeholders about the TEG’s final report and the Commission’s next steps, a joint document with frequently asked questions has been published by the Commission and the TEG.
During its mandate, the TEG also engaged with over 200 additional experts to develop their recommendations for the technical screening criteria.
Frequently asked questions
- What is the EU taxonomy and how will it work in practice?
- Questions and Answers: Taxonomy Climate Delegated Act and Amendments to Delegated Acts on fiduciary duties, investment and insurance advice
- What is the EU taxonomy Article 8 Delegated Act and how will it work in practice?
- How should financial and non-financial undertakings report taxonomy-eligible economic activities and assets in accordance with the Taxonomy Regulation Article 8 Disclosures Delegated Act?
- Draft Commission notice on the interpretation of certain legal provisions of the Taxonomy Regulation Article 8 Disclosures Delegated Act on the reporting of eligible economic activities and assets