The EU Taxonomy is a cornerstone of the EU’s sustainable finance framework, providing a transparent and evolving system for classifying and reporting on sustainable economic activities.  

Its primary purpose is to provide a common language and clear criteria for sustainability, helping direct investments toward projects and activities that support the EU’s climate and energy targets for 2030 and the overarching goal of achieving net zero emissions by 2050.

The taxonomy is in its core a classification system for economic activities. Like a typical classification system, it has rules and definitions. These rules and definitions determine which economic activities can be considered sustainable.

The definition of a sustainable economic activity is based on four criteria. An activity must: 

1. Contribute to one out of the six environmental objectives
2. Do no significant harm (DNSH) to the other five objectives 
3. Comply with minimum safeguards
4. Comply with technical screening criteria

1. The six environmental objectives 

To determine if an activity is sustainable, it must contribute to one of the following six environmental objectives: 

1. Climate change mitigation 
2. Climate change adaptation 
3. Sustainable use and protection of water and marine resources 
4. Transition to a circular economy 
5. Pollution prevention and control 
6. Protection and restoration of biodiversity and ecosystems 

2. Do no significant harm (DNSH) 

The "Do No Significant Harm" (DNSH) rule ensures that any economic activity classified as sustainable under the EU Taxonomy must not cause significant harm to any of the other five environmental objectives.  

This means that even if an activity contributes positively to one objective, it cannot undermine progress in areas like water protection, pollution prevention, or biodiversity. 

3. Minimum safeguards 

To comply with minimum safeguards under the EU Taxonomy, companies must implement due diligence and remedy procedures that align their operations with international standards such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. 

This includes ensuring respect for human and labor rights, anti-corruption, and responsible business conduct across their own activities and value chains.

4. Applicable technical screening criteria 

To comply with applicable technical screening criteria under the EU Taxonomy, companies must ensure each activity meets the specific requirements set for their sector. 

• Identify the relevant criteria for each economic activity. 

• Assess whether activities meet the defined thresholds (e.g., emissions limits, resource use). 

• Collect and document evidence to demonstrate compliance with all criteria.

The EU Taxonomy serves as the foundational classification system for environmentally sustainable economic activities within the EU’s broader sustainable finance framework.

It is directly integrated into major reporting regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR), ensuring that sustainability disclosures across companies and financial products are consistent and comparable.

CSRD

The CSRD requires companies to report how much of their turnover, capital expenditures (CapEx), and operating expenditures (OpEx) are aligned with the EU Taxonomy’s criteria for sustainability. This means that the Taxonomy’s definitions and metrics are embedded within the CSRD’s mandatory sustainability reporting, making it a core part of how companies communicate their environmental performance.

SFDR

Financial institutions subject to the SFDR must disclose the extent to which their investment products are invested in Taxonomy-aligned activities. To do this, they rely on the Taxonomy-based disclosures made by companies under the CSRD, creating a data flow and alignment between corporate and financial sector reporting.