The European Taxonomy: A Framework for Sustainable Finance

The European Taxonomy is an ambitious regulatory framework adopted in 2020, aimed at classifying economic activities based on their contribution to the European Union’s sustainability goals. Designed to support the transition to a sustainable economy, it aligns with the objectives of the European Green Deal and the Paris Agreement. The taxonomy is divided into two main branches: the environmental taxonomy and the social taxonomy.

The taxonomy primarily applies to companies subject to non-financial reporting obligations under Article 19a or 29a of Directive 2013/34/EU. This includes public interest entities (PIEs) with more than 500 employees and either a balance sheet total exceeding €20 million or net revenues over €40 million. PIEs include:

• Companies with securities listed on European regulated markets,
• Credit institutions as defined in Regulation (EU) No 575/2013,
• Insurance undertakings as defined in Directive 91/674/EEC,
• Parent companies of large groups, provided they meet the PIE criteria.

Companies not subject to mandatory reporting can voluntarily publish their taxonomy alignment. Given the growing "investor expectations" for ESG reporting, voluntarily disclosing taxonomy alignment can serve as a differentiator for companies, promoting transparency and appealing to sustainability-minded investors and partners.

The environmental taxonomy classifies economic activities according to their contribution to six environmental objectives, including climate change mitigation and adaptation, the protection of water resources, and the transition to a circular economy. It helps companies and investors identify and align their activities with the EU’s climate targets to achieve carbon neutrality by 2050.

The implementation of this framework is based on a three-step process:

1. Identifying eligible activities: Companies must determine whether their activities fall under those listed in the taxonomy, which covers about 90% of the EU’s greenhouse gas emissions. These activities span 13 macro-sectors, representing critical areas for climate action.
2. Assessing alignment with technical criteria: This step ensures that an activity makes a substantial contribution to at least one objective without significantly harming others. Companies must also comply with minimum social safeguards based on international human rights standards.
3. Publishing key performance indicators: Non-financial companies must disclose the share of their revenues, investments, and operating expenses aligned with the taxonomy. Financial actors will calculate a "green asset ratio," reflecting their alignment with sustainability objectives.

The scope of the taxonomy will expand between 2024 and 2026 with the implementation of the Corporate Sustainability Reporting Directive (CSRD), which will include 38,000 additional European companies, particularly those with more than 250 employees or €50 million in revenue.

Complementing the environmental dimension, the social taxonomy aims to channel capital flows toward activities that respect human rights and promote responsible corporate governance. Introduced in 2022 by the Sustainable Finance Platform (SFP), it focuses on three key objectives:

1. Decent work, including labor conditions in the supply chain.
2. Adequate living standards and well-being for consumers and end users.
3. Inclusive and sustainable communities, promoting equality and social cohesion.

The social taxonomy follows the methodological principles of the environmental taxonomy, with clear objectives and the requirement that activities do not harm other social or environmental goals. Companies must also demonstrate compliance with minimum human rights and governance standards.

The European Taxonomy, in its entirety, offers a clear and coherent view of what the EU considers sustainable, both environmentally and socially. It serves as a crucial tool for investors and companies seeking to align with sustainability goals while directing financing toward projects with a strong positive impact. With the introduction of the CSRD and standards such as the ESRS (European Sustainability Reporting Standards), the taxonomy will contribute to greater transparency, making it easier to assess the sustainability of activities and encouraging the transition toward a greener and more equitable economy.

If you're subject to these regulations or engaging voluntarily, here are some steps to prepare for implementation:

• Identify your company's activities that fall under the EU taxonomy.
• Understand and master the calculation methods for sustainability indicators and technical alignment criteria.
• Adapt your data collection or production processes as needed to ensure the calculation of sustainability indicators.

Need help? Contact us for assistance in navigating the taxonomy framework.