In depth

Deep dive into the key characteristics of the EU sustainable finance regulation

Taxonomy

Taxonomy

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The EU Taxonomy Regulation (EU Taxonomy – Regulation (EU) 2020/852) is a Regulation introduced by the European Commission, as a key component of its Action Plan: Financing Sustainable Growth, published in 2018. It represents an important step for the European Union (EU) to meet the goals of the Paris Agreement and achieve climate neutrality by the EU by 2050. Among other objectives, the Sustainable Finance Action Plan aims to reorientate capital flows towards a more sustainable economy and foster transparency and long-termism in financial and economic activities.

Such a shift of capital flows needs to be underpinned by a shared understanding of what constitutes ‘environmentally sustainable’ activities. To that end, the EU Taxonomy Regulation establishes a unified classification system that supports the evaluation of economic activities (1) to determine those that can be considered ‘environmentally sustainable’ based on science-based technical screening criteria contributing to six different environmental objectives.

An economic activity included in the EU Taxonomy is defined as “Taxonomy eligible”, (i.e. an activity falls within a defined category) however, in order to be considered “Taxonomy-aligned”, a taxonomy-eligible activity should contribute substantially to at least one of the following six environmental objectives:

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

In addition, besides contributing to at least one of the environmental objectives, the activity must also successfully pass two other conditions to be defined as “Taxonomy-aligned”:

  • Firstly, cause no significant harm to any of the remaining environmental objectives (DNSH), as per Article 17, Regulation (EU) 2020/852. This principle defines the criteria that eligible economic activities must respect to ensure that they do not generate any significant negative impact on the other EU Taxonomy objectives; and
  • Secondly, comply with a set of defined minimum social safeguards (MSS), as per Article 18, Regulation (EU) 2020/852. The MSS ensure that a company and its economic activity(ies) adhere to the following internationally-recognized standards and guidelines:
    • The OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (as updated in 2023);
    • The UN Guiding Principles on Business and Human Rights;
    • The principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights.

Please note, the Taxonomy Regulation (Level 1 – (EU) 2020/852) is the primary legislation, adopted in June 2020. It establishes the overall framework and legal architecture and broad requirements but does not specify the technical screening criteria or prescribe the disclosures requirements.

Level 2 of the EU Taxonomy framework consists of the Delegated Acts that translate high-level requirements of the Taxonomy Regulation into practice, binding rules, and supplement the Taxonomy Regulation and provide fundamental information necessary for applying the principles established by the Taxonomy Regulation.

There are two main types of delegated acts:

  • The Technical Screening Criteria (TSC) Delegated Acts: These define the specific thresholds and conditions an economic activity must meet to be considered as making a substantial contribution to each environmental objective and not casing significant harm to the others. These include the following:
Act Regulation Number Scope
Climate Delegated Act (CDA) – Commission Delegated Regulation (EU) 2021/2139 of 4 June 2021 Technical Screening Criteria for climate objectives 1 and 2 (Mitigation and Adaptation)
Complementary Climate Delegated Act Commission Delegated Regulation (EU) 2022/1214 Introduced nuclear and natural gas activities as transitional/enabling activities under specific conditions
Environmental Delegated Act (EDA) Commission Delegated Regulation (EU) 2023/2486 of 27 June 2023, published November 2023 Technical Screening Criteria for objectives 3–6: Water, Circular Economy, Pollution Prevention, Biodiversity
  • The Disclosure Delegated Act (EU 2021/2178), which specifies how companies must report under Article 8 of the EU Taxonomy Regulation, setting out the KPI methodologies, reporting templates and timelines for both non-financial undertakings (Turnover, CapEx and OpEx ratios) and financial undertakings (such as the Green Asset Ratio for banks).

These Delegated Acts were adopted in 2021 and 2022 respectively and are now considered complete at the original level, though they were subsequently reopened and amended as part of the Omnibus simplification initiative in July 2025, leading to the following Delegated Act:

Act Regulation Number Scope
Omnibus Delegated Act Commission Delegated Regulation (EU) 2026/73 Effective January 2026,  amends all of the Delegated Acts proposing simplification of disclosure templates, introduction of materiality thresholds, and targeted DNSH simplifications

Please see section ‘What Impact Does it Have for Financial Services?’ for further detailed information.

At present, the EU Taxonomy does not cover social dimensions. Works and discussions towards the EU Social Taxonomy have been paused indefinitely in to prioritize other EU initiatives.

Notes: 

(1) An economic activity means every activity a company performs that uses resources (e.g., labour) to generate a product (e.g., goods or services). 

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