What is the EU Taxonomy Regulation on Sustainable Finance?

4 min readMar 12, 2021

Green or “Green”? What qualifies as a green (sustainable) economic activity? The EU Taxonomy sets out uniform rules and definitions to guide green investments to achieve low carbon and inclusive growth.

If we were to ask ten people to define sustainable or green, we would probably end up with ten different definitions. And that’s the problem facing the sustainable investment sector.

The demand for green is growing, but what the term “green” means remains undefined. Currently, there is no common definition and standard and attempts to define it depend on industry standards and self-reporting.

In this post, I’ll define the EU Taxonomy Regulation on Sustainable Finance, and show whom it affects and its implications.

What is the EU Taxonomy?

As a part of the EC’s Sustainable Finance Action plan, the Taxonomy Regulation (EU) 2020/852 provides investors with a standard for defining green investments. It creates a common language and understanding to improve environmental performance.

The EU is seeking to improve environmental performance by directing private capital towards activities that are genuinely sustainable whilst preventing “greenwashing” — false claims on the sustainability of investments. To prevent “greenwashing,” companies that report on their activities must align with the regulation’s definition of green or sustainable.

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What are the Taxonomy’s objectives?

For an activity to qualify as green, it must meet these three requirements:

1). Substantially contribute to one of the six environmental objectives:

✔ Climate change mitigation — activities that contribute to the stabilisation of the greenhouse gas concentrations, i.e., renewable energy or carbon capture and storage

✔ Climate change adaptation — activities that contribute to reducing the negative effects on the current and expected future climate

✔ Sustainable use and protection of water and marine resources — activities contributing to sustainable use and protection of water and marine resources, i.e., improving water efficiency

✔ Transition to a circular economy, waste prevention, and recycling — activities, i.e., improving recyclability, durability, “reparability”, or reusability of products

✔ Pollution prevention and control — activities that reduce air, water and soil pollutant and significantly minimise adverse effects on human health and the environment

✔ Protection and restoration of ecosystems — activities that promote sustainable land management, protection of soil biodiversity, sustainable agriculture, and sustainable forest management.

2). Does not significantly harm the other five environmental objectives where relevant

3). Meets the minimum safeguards (e.g., OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights).

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Who is the EU Taxonomy for?

The measures apply to:

Measures by the EU member states that set requirements for environmentally sustainable financial products e.g., investment funds, pensions, and Green Bonds
Financial market participants offering financial products subject to the Sustainability-Related Disclosures
Large companies providing non-financial statements, according to the Non-Financial Reporting Directive (NFRD).

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Not so fast, critics of the taxonomy say

One-size-fits-all approach: critics argue that the taxonomy doesn’t account for regional differences which could further burden industries and states.
No middle ground: according to Mark Carney, former governor of the Bank of England, the taxonomy is binary in identifying assets only as either green or brown; It doesn’t consider opportunities related to the transition from brown to green.
Rewards system: in her article, Anna-Michelle Asimakopoulou, a Member of the European Parliament, cites concerns over the fact that the regulation won’t reward the efforts of players currently taking steps to reduce their carbon emissions.

In the end, the EU Taxonomy Regulation remains an ambitious and necessary step towards the creation of a common standard for classifying green activities — ultimately achieving an inclusive and low-carbon transition.

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The final Taxonomy report

Final EU Taxonomy report. Source: @UNPRI (https://www.unpri.org/policy/eu-sustainable-finance-taxonomy)

In this article, I share the EU’s efforts to set a common language and standard for green investments; I define and the EU Taxonomy Regulation and summarise its key.

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