Understanding the EU Taxonomy

The Taxonomy provides a classification system for defining sustainable economic activities that:

• Promote a shared understanding among stakeholders.
• Scale-up sustainable investment.
• Protect against greenwashing.
• Encourage climate-friendly business practices.
• Foster market transparency and cohesion.
• Ensure alignment with climate and energy goals while mitigating market fragmentation.

Objectives and criteria of the EU Taxonomy

The EU Taxonomy identifies two climate-related and four environmental objectives:

• Climate change mitigation.
• Climate change adaptation.
• The sustainable use and protection of water and marine resources.
• The transition to a circular economy.
• The protection and restoration of biodiversity and ecosystems.
• Pollution prevention and control.

These objectives are supported by The Climate and Environment Delegate Regulation’s which lists activities contributing to the Taxonomy objectives.

There are two types of technical screening criteria (TSC):

1. Substantial Contribution: ensures the economic activity has a significant positive impact on the goals of the objective, either through its own operations or by influencing other value chains.
2. Do No Significant Harm (DNSH): ensures the economic activity does not harmfully impact the other objectives.

Two concepts in European Taxonomy reporting are:

1. Eligibility: An activity is ‘eligible’ for Taxonomy reporting if it matches with the description of an activity listed in the Climate or Environmental Delegated Regulations.
2. Alignment: An activity is ‘aligned’ if it complies with all TSC associated with the listed activity and meets the minimum safeguards.

While this regulation focuses primarily on environmental issues, social and governance factors must also be considered when assessing the Taxonomy ‘alignment’ of economic activities. Article 18 of the Taxonomy Regulation covers the minimum safeguards. In addition to collecting data, businesses[ND1] will need to demonstrate that their due diligence process and assessment criteria for activities are robust so that the economic activity does not breach key guidance, such as the UN Guiding Principles on Business and Human Rights.

Reporting under the EU Taxonomy

Only economic activities that are Taxonomy ‘aligned’ and comply with the minimum safeguards are eligible for EU Taxonomy reporting. Article 8 of the Taxonomy Regulations sets out the reporting metrics. Businesses are required to report:

• The proportion of turnover derived from products or services associated with Taxonomy-aligned economic activities.
• The proportion of capital expenditure related to assets or processes associated with taxonomy-aligned economic activities.
• The proportion of operating expenditure related to assets or processes associated with taxonomy-aligned economic activities.

Reporting clear, consistent metrics enables stakeholders to compare businesses and assess how "green" a company is.

The process for correctly assessing economic activity alignment for Taxonomy reporting can be challenging. Any limitations or assumptions underpinning the assessment process must be clearly documented. Additionally, data to support reporting under the Taxonomy metrics may not be readily available in some businesses and work will be required to source appropriate data and design related assumptions.

How the EU Taxonomy interacts with other Regulations

The Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and the EU Taxonomy are all underpinned by the UN Guiding Principles on Business and Human Rights, and the OECD Guidelines for Multinational Enterprises. Businesses can best prepare by assessing whether they are in scope of all regulatory reporting and by completing a gap analysis against identified reporting requirements. Further to this, if businesses ensure they have a robust due diligence process in place for their own operations and throughout their value chain, this will support readiness.

• CSRD: The European Sustainability Reporting Standards (ESRS) can provide useful information for minimum safeguards analysis, including the due diligence process mentioned in ESRS 1&2. ESRS G1 can provide elements on responsible business conduct.
• CSDDD: Provides guidance on how businesses should identify, assess, prioritise, mitigate, and monitor their impacts on people.
• EU Taxonomy: Ensures alignment with the ‘Minimum Safeguards’requirement under article 18.

The European Commission (EC) regularly updates and releases additional guidance to support EU Taxonomy reporting; in November 2024, the EC released FAQs on the EU taxonomy, adding to the frequently asked questions guidance already available for CSRD and CSDDD. Businesses should identify and understand synergies across regulations as soon as possible. Furthermore, in December 2024, the Commission announced it is reviewing an omnibus for the three regulations, with the next update expected on the 26 of February 2025.

How Forvis Mazars can support your business

At Forvis Mazars, we are here to support you on your journey and meet you where you’re at.  While the recent updates are welcomed, we understand that they can also create confusion and challenges in understanding the right data to collect and how best to prepare for regulatory reporting. 

To support businesses in navigating the EU taxonomy, Forvis Mazars has created a guide, ‘EU Taxonomy guide Navigate the EU taxonomy and related regulations’. This guide provides practical insights into navigating the EU Taxonomy framework, explains the framework and highlights key features of the taxonomy, such as the ‘Do No Significant Harm’ principle.

The guide emphasizes the importance of aligning with corporate ESG strategies and enhancing transparency to build trust with stakeholders. It also encourages leveraging the Taxonomy as a sustainable growth and innovation tool.