An Introduction to the EU Taxonomy

In response to this need, the European Commission developed the EU Taxonomy: a classification system that defines what economic activities can be deemed sustainable. 

Six environmental objectives have been outlined in the Taxonomy Regulation:

1. Climate change mitigation (01.01.2022)
2. Climate change adaptation (01.01.2022)
3. The sustainable use and protection of water and marine resources (expected 01.01.2023)
4. The transition to a circular economy (expected 01.01.2023)
5. Pollution prevention and control (expected 01.01.2023)
6. The protection and restoration of biodiversity and ecosystems (expected 01.01.2023)

The Taxonomy identifies relevant economic activities for each of these environmental objectives. In conjunction with these activities, technical screening criteria are listed, which define whether an activity contributes substantially to the achievement of the environmental objective.

For an economic activity to qualify as taxonomy-eligible, it should be described under the EU taxonomy making a substantial contribution to at least one of the six environmental objectives and having technical screening criteria (without needing to comply with these TSC).

On the other hand, for an economic activity to become taxonomy-aligned, a step beyond meeting the eligibility criteria is necessary.

Here, the following four criteria need to be met:

1. Substantial contribution to one or more goals of the EU Taxonomy. This also includes complying with technical screening criteria for substantial contribution (details see below).
2. Do No Significant Harm (DNSH) principle: minimum requirements an activity must meet with respect to the other environmental objectives.
3. Minimum safeguards based on certain human rights standards: Taxonomy-aligned economic activities must meet safeguards related to international human and labour rights. It is the responsibility of the provider of the economic activity to conduct due diligence and comply with OECD guidelines for multinational enterprises, UN Guiding Principles on Business and Human Rights, and the Labour Rights Convention in order to avoid negative impacts.
4. Complies with the Technical Screening Criteria (TSC): mostly very detailed, science-based criteria, based on best practices in the market. By using these technical screening criteria, companies are encouraged to take measures either to make a substantial positive environmental impact or to significantly reduce their negative environmental impact. This will enable them to reach the environmental goals of the EU Green Deal.