What is the EU Taxonomy?

The “EU Taxonomy” is a European legislation designed to answer one of the key questions of our time: What are criteria for an ecologically sustainable economy?

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.

The screening criteria for each of these objectives are being defined in secondary legislative acts.

While the regulations for environmental objectives 1 and 2 are already in force, the directive defining the criteria for objectives 3-6 is still in the draft stage. Additionally, there will be supplementary protocols for specific topics, such as corporate disclosure and reporting or agriculture. Hence, the Taxonomy is not yet a finished product. On this page, you will find regular updates and analyses on further developments.

The definition of standardized criteria for sustainability is a step of fundamental importance for the transformation of our economy in the fight against climate crisis and critical biodiversity loss, as illustrated for example by the fierce struggle over the classification of gas and nuclear energy as sustainable transitional technologies.

We want to provide orientation to citizens and civil society on where to focus and concentrate their advocacy efforts for the Taxonomy, so it can really fulfil its purpose instead of becoming another toothless paper tiger. Simultaneously, we want to support businesses and political decision makers in staying true to the ambitious ecological goals of the Taxonomy and help them identify challenges for implementation and supervision in a timely manner.

• 03/2018: EU Commission publishes action plan on financing sustainable growth.
• 07/2018: EU Commission establishes Technical Expert Group (TEG).
• 03/2020: TEG publishes its final report on the EU Taxonomy.
• 06/2020: Taxonomy Regulation published.
• 07/2020: Taxonomy Regulation enters into force.
• 10/2020: Constitution of the Platform on Sustainable Finance.
• 04/2021: Regulation on environmental objectives 1+2 (“Climate Delegated Act”) agreed on in principle..
• 06/2021: Platform on Sustainable Finance presents draft for technical screening criteria for environmental objectives 3-6 (“Taxo 4”).
• 07/2021: Disclosure Delegated Act published.
• 01/2022: Climate Delegated Act and Disclosure Delegated Act enter into force; Corporations are required to disclose Taxonomy-relevant activities.
• 01/2022: Platform on Sustainable Finance publishes a critical analysis on the draft of a complementary delegated act submitted for consultation by the EU Commission that sets conditions for the classification of gas-fired and nuclear power generation as sustainable economic activities under the taxonomy. The Platform particularly criticizes that the draft departs from the hitherto established science-based approach and therefore threatens to undermine the taxonomy as a whole. The Platform also recommends specific amendments.
• 02/2022: The EU Commission presents its draft to the public, largely ignoring observations and recommendations given by the Platform on Sustainable Finance. Heated debates follow.
• 07/2022: In spite of heavy criticism, the delegated act allowing for the classification of gas and nuclear power as sustainable energy sources under the taxonomy is confirmed by the European Parliament and the Council of the EU. EU member states Austria and Luxemburg as well as several civil society organizations declare their intention to contest the decision in court.
• 07/2022: Platform on Sustainable Finance publishes draft report on minimum safeguards regarding human and labor rights.
• 09/2022:5 environmental and consumer protection organizations resign from the Platform on Sustainable Platform in protest. They argue that the decision to classify gas and nuclear power as sustainable investments disregards scientific facts in favor of sectoral interests and institutional greenwashing.
• 09/2022: A group of NGOs from 7 EU member countries files a lawsuit at the European Court of Justice against the inclusion of biomass and forestry projects in the taxonomy.
• 10/2022: Platform on Sustainable Finance publishes final report on minimum safeguards regarding human and labor rights and recommendations on data and usability.
• 10/2022: Public call for applications for membership in the Platform on Sustainable Finance for the 2023/24 mandate. Application deadline is November 9th.
• xx/2022: EU Commission is slated to report on the state of implementation of the Taxonomy.
• xx/2022:Technical screening criteria for environmental objectives 3-6 (“Taxo 4”) published and approved.
• 01/2023: Complementary delegated act on gas and nuclear power set to enter into force.
• 01/2023: Start of the new mandate of the Platform on Sustainable Finance (running through 12/2024), reduction to 35 members.
• xx/2023: „Taxo 4“ enters into force. Corporations report for the first time on their level of Taxonomy-compliance.
• 01/2024: Financial institutions report for the first time on the level of Taxonomy-compliance of their investment portfolios. 

Together with the Sustainable Finance Disclosure Regulation (SFDR) of 2019, the Taxonomy represents the first two building blocks of the EU Action Plan on Financing Sustainable Growth. The SFDR requires financial institutions to make transparent if and how they take sustainability aspects into account. The Action Plan in turn is part of the European Green Deal through which the EU want to achieve net-zero greenhouse gas emissions until 2050 and decouple economic growth from resource use.

The EU Taxonomy is comprised of the Taxonomy regulation itself, which establishes the general framework of the Taxonomy and several so-called “delegated acts”. The latter as of yet are only partially finished and regulate the specific screening criteria for the different ecological objectives and economic sectors, procedural details like for example further disclosure requirements and reporting periods or especially contentious topics like transitional rules for gas and nuclear power.

The Taxonomy regulation itself entered into force in July 2020 and establishes the general framework of the Taxonomy. As fundamental pillar of the sustainability assessment, it defines six environmental objective (see Taxonomy regulation, art. 9):

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.

In order to be classified as sustainable under the Taxonomy, an economic activity must “contribute substantially” to one of these objectives, “avoid significant harm” to the others and also comply with the most important international convention on labor and human rights (such as the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, and the ILO Declaration on Fundamental Principles and Rights at Work, see Taxonomy regulation, art. 18).

These points are crucial regarding the further development and effectivity of the Taxonomy: What exactly is a “substantial contribution”? What is “significant harm”? While the Taxonomy regulation itself provides general orientation on these issues (see Taxonomy regulation, art. 10-16), the actual technical screening criteria will be defined by separate “delegated acts”. At the end, it is here where the real reach of the Taxonomy will be decided. The drafting of these delegated acts should therefore be closely monitored and accompanied by civil society organisations.

One important actor in that process will be the Platform on Sustainable Finance. The Platform is an expert group with 68 Members from the academic, finance and civil society sectors, which advises the EU Commission on the design of the Taxonomy. Among the 57 full members, 50 were chosen through a public call for proposals, while the remaining 7 represent European institutions (European Environment Agency, European Investment Bank, European Investment Fund, the three European Supervisory Agencies and the European Agency for Fundamental Rights). The final 11 seats where given in an observing capacity to other European and international institutions such as the Organisation for Economic Co-operation and Development (OECD) or the European Central Bank. While several civil society organisations gained access through the public call for proposals, they are heavily underrepresented in comparison to economic actors. The same goes for representatives from the independent scientific community.

For the second mandate phase from 2023 to 2024, the Platform will be reduced to 35 members. Up to 28 of these are set to be selected through a new public call for proposals.

Until autumn of 2022 the Platform has published proposals on three crucial topics:

• Extension of the Taxonomy through different impact and performance levels: In its current form, while gathering information on a lot of different categories, the Taxonomy only knows the final verdicts “Taxonomy-aligned” or “non-aligned”. At a time when gradual improvement is insufficient to ensure long-term sustainability, and transformational changes are needed, this is intended to acknowledge and encourage best practices. However, the European Commission estimates that as of 2022 only 1 to 5 % of all financial assets fulfill the Taxonomy’s green criteria (a number expected to rise steeply through implementation of the European Green Deal, see FAQ: What is the EU Taxonomy and how will it work in practice?). A concentration of investments into this small percentage of already Taxonomy-compliant assets may create the risk of a lack of funds for transition efforts. To alleviate these concerns the Platform proposes to further differentiate Taxonomy-assessment by taking into account different environmental performance levels and levels of environmental impact (e.g. lack of positive impact on the environment vs. negative impact). This aims to “make transition finance more widely available, whilst not diluting incentives to ‘go green’”. With this additional information, investors who do not orient their decisions primarily on ecological sustainability might also be compelled to at least avoid financing severe ecological harm. At the same time, the Platform advises caution to maintain the balance between additional information and excessive complexity in reporting.
• Screening criteria for environmental objectives 3-6: Concerning forest conservation, the proposed screening criteria seem more ambitious than those for environmental objectives 1 and 2 (“Climate Delegated Act”). However, comparisons are difficult due to the different goals pursued.
• Extension towards a social taxonomy: Up until now, the Taxonomy in its current design is mostly a “green taxonomy”. Recognizing the need for investments in just transition and social sustainability, the Platform suggests to broaden its scope towards social objectives. It frames the environmental taxonomy as just a starting point and among other issues, discusses the development of criteria for “substantial contributions” and “significant harm” of economic activities to social objectives.

The Platform has also organised three public consultations on different aspects of the taxonomy. As of yet, it is unclear to what degree the comments and proposals from these processes will be included in the finalized Taxonomy.

In the ForestInvestment II-project, OroVerde together with the Global Nature Fund examines potential impacts of the Taxonomy on forests, climate change and biodiversity. Our colleague Jan Ohnesorge also represents us in the relevant public consultations.

In principle, there are two types of delegated acts: The first refers to the ecological objectives defined by the Taxonomy Regulation and the respective screening criteria, the second sets complementary regulations on specific related issues.

The technical screening criteria for “substantial contributions” or “significant harm” with regard to the different environmental objectives of the EU-Taxonomy are defined in two delegated acts:

• The first is known as the “Climate Delegated Act”. It considers the environmental objectives of climate change mitigation and adaptation (environmental objectives 1+2), was finalized in June 2021 and entered into force on January 1st 2022.
• The delegated act that will define the remaining four environmental objectives (sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, protection and restoration of biodiversity and ecosystems) is often referred to as the “Taxo 4”. The Platform on Sustainable Finance has drafted a proposal consisting of a conceptual document outlining the logic applied in designing the criteria and an annex with a full list of proposed technical screening criteria. The proposal was subjected to a public consultation in which OroVerde participated as well. The finalized act is expected towards the end of 2022.

Regarding forestry, the Climate Delegated Act mainly relies on compulsory Forest Management Plans. However, OroVerde considers it also necessary to establish clear standards for forestry practices since some conventional methods like clear cutting or monocultures pose severe problems to carbon dioxide sequestration, biodiversity, water cycles and temperature regulation. Another weak point is monitoring and control, which may be carried out by public institutions or private certification agencies. The latter would be contracted by the audited companies themselves, and the Climate Delegated Act does not specify admissibility criteria. Therefore, independence and objectivity of the evaluations are at least doubtful.

The Taxo 4-draft partly addresses these shortcomings by establishing differentiated standards for different forms of forest management. It distinguishes three general forms of commercial forestry: plantations of non-native trees, plantations of native trees, and “close to nature managed forest” consisting of “self-sown native trees […] with a characteristic forest structure with interesting biodiversity”. Every type of forestry practices needs to fulfil different criteria in order to be recognized as Taxonomy-aligned. For example, Close to Nature Forestry undertakings would have to exclude 10% of the exploited area from logging and set them aside for the creation or conservation of high biodiversity forest areas. In contrast, plantations of non-native trees would have to set aside 30% of the area and convert another 20% to Close to Nature Forestry or set them aside as well.

It is not yet clear, how many regulations on special topics will complement the taxonomy. As of yet, we have more details on three of them:

• The Disclosure Delegated Act was published in July 2021. It further specifies timeframes and indicators for taxonomy-related corporate disclosure obligations. For example, it defines the revenue share of Taxonomy-aligned activities as a key indicator for non-financial economic enterprises or respectively their share in the total investment portfolio for financial institutions. For the reporting year 2021 only qualitative estimates are required, starting with 2022 for non-financial enterprises and 2023 for financial actors, quantitative indicators are compulsory (see also EU Commission FAQ on the Disclosure Delegated Act).
• Because no consensus on the sustainability rating of Natural Gas and Nuclear Power as energy sources could reached in the negotiations on the Climate Delegated Act, these topics were excluded and transferred to a separate complementary regulation published in February 2022, which has been confirmed by the European Parliament in July 2022. It establishes the concept of transitional technologies and classifies gas and nuclear power as such. This would allow the continued declaration of investments in these sectors as Taxonomy-aligned for years to come. In the case of Nuclear Power, the extreme risks radioactive waste, which takes millennia to decay, poses for human well-being and the environment render this regulation highly problematic. Gas in turn is a fossil fuel and therefore under no circumstances a sustainable energy source. Gas-based power generation generates not only high levels of carbon dioxide but due to leakages during extraction, storage and transport also hitherto underestimated methane emissions. Moreover, greenwashing of these energy sources might draw urgently needed investments away from the expansion of the renewable energy sector. A classification of gas and nuclear power as taxonomy-aligned therefore sends the wrong signal for the future. The German Federal Environment Agency (Umweltbundesamt – UBA) provides a more detailed analysis on these issues. In the current geopolitical context, the dependency of some European countries on Russian gas deliveries is also increasingly viewed as a liability. Austria and Luxemburg as well as several civil society organizations have announced the intention to take up legal action against the decision.
• A regulation specifically focusing on agriculture has been announced.

• Online recording (in German) of an introductory seminar on the Taxonomy hosted by OroVerde and the Global Nature Fund. 
• Fact Sheet on the ForestInvestment II-project.
• OroVerde also works on the Supply Chain Responsibility legislation in Germany and the EU and its significance for tropical forest. Read our summary and analysis here (in German). An article by our colleagues Nathalie Grychtol and Lioba Schwarzer has also been published by German newspaper Frankfurter Rundschau.
• In an in-depth article, experts from OroVerde and Global Nature Fund analyze the potential impact of the taxonomy on the sustainability of investments in forest areas (in German).
• The website of the Platform on Sustainable Finance offers updated information on its proposals and outreach activities.
• In July 2021, the European Commission published a press release on the EU-strategy for sustainable finance.
• The “Taxonomy Compass” compiled by the EU Commission offers an regularly updated overview over the regulations relevant to different economic sectors.

• Advice and participation opportunities on sustainable forest investments for investors and financial actors.
• Campaign against the classification of gas and nuclear power as sustainable energy sources. 
• Other campaigns supported by OroVerde. 

Fotography copyrights: OroVerde/Annelie Fincke + Shutterstock/Alexandros Michailidis (EU-flag in front of aerial view of tropical forest), OroVerde/Heiko Mennigen (coins with seedling), OroVerde (calimate strike), OroVerde/Jonas Rüger (bee on coffee flower)