Faced with the climate emergency, the European Union (EU) has adopted a new classification tool: the European green taxonomy. The objective? Guide investments towards the most sustainable economic activities, in order to promote the achievement of the EU's climate goals, and in particular carbon neutrality by 2050.
But what exactly does this term cover? Why was this classification put in place? Is your business affected? What activities are considered “sustainable” and can therefore be integrated into the European taxonomy? How do CSRD and green taxonomy fit together? And in concrete terms, what information will companies have to provide in their CSRD sustainability report in connection with the green taxonomy?
In this article, we go through all these questions and provide you with the keys to fully understand this new essential nomenclature.
1. What is the European green taxonomy?
Adopted in 2020 by Taxonomy Regulation 2020/852, the European Green Taxonomy is a classification system that aims to identify, based on numerous criteria, the economic activities of a company considered to be “sustainable” and “green” from an environmental point of view.
Concretely, it is a common framework at European level that makes it possible to assess whether or not an activity contributes to the achievement of at least one of the 6 environmental objectives defined by the EU. This regulation defines precise criteria for determining whether or not a given economic activity can be considered “sustainable” and therefore be integrated into the European Union's taxonomy.
The six environmental goals set by the EU are as follows:
- Climate change mitigation.
- Adaptation to climate change.
- Sustainable use and protection of aquatic and marine resources.
- The transition to a circular economy.
- The prevention and reduction of pollution.
- Protection of biodiversity and ecosystems.
2. Why was the European green taxonomy put in place?
The main objective of the green taxonomy is to direct financial flows as much as possible to the most environmentally friendly activities by helping investors to distinguish which activities are truly sustainable from those that are not.
Other objectives are being pursued by the EU thanks to this new taxonomy: to provide a clear and uniform reference at European level, to fight against greenwashing and to increase the transparency of financial markets, for example.
3. Is your company concerned by the European green taxonomy?
There is a great chance! Indeed, many companies have the obligation to include in their extra-financial reporting information related to their activities considered to be “sustainable” within the meaning of the green taxonomy:
- Since 2022, large companies with more than 500 employees, already subject to the NFRD (Non Financial Reporting Directive), and therefore to the obligation to provide an extra-financial report, must publish indicators related to the green taxonomy.
- Since 2024 and the entry into force of the CSRD (Corporate Sustainability Reporting Directive), which replaces the NFRD, the scope of extra-financial reporting has been expanded. Thus, any company subject to the CSRD directive must publish information on its eligible activities that are aligned with the green taxonomy. To find out if you are affected by the CSRD, do not hesitate to consult our article”Everything about the CSRD: extra-financial reporting obligations”
- Conversely, companies not subject to CSRD are not directly obliged to comply with the European taxonomy. However, they may be indirectly affected and may also be encouraged to do so because of their commercial relationships, for strategic reasons or if they are looking for financing, for example.
Businesses are not the only ones affected by the European Green Taxonomy and other actors are as well. Among them, EU Member States (which implement green financial products or green bonds); certain financial market players such as asset managers and investment funds who must be able to justify how their products integrate the taxonomy or even central banks or insurance companies that must be transparent about the nature of their investments.
4. What are the “sustainable” economic activities that can integrate the European green taxonomy?
Concretely, to be classified as “sustainable” and to integrate the green taxonomy, the activity must respect several cumulative criteria set out in European texts.
- On the one hand, the activity must contribute substantially to at least one of the six environmental objectives defined by the EU mentioned above (adaptation to climate change, climate change mitigation, etc.)
- On the other hand, economic activity must comply with the “Do No Significant Harm” (DNSH) principle, thus ensuring that it does not harm and does not cause any significant damage to some of the other environmental objectives mentioned above.
- Finally, the economic activity in question must respect the minimum guarantees of human rights and labor law.
In addition to activities that in themselves contribute to the achievement of the EU's environmental objectives, two other categories of activities are also planned by the EU and taken into account in the taxonomy:
- Enabling activities: these are those that do not directly achieve one of the EU's objectives but allow other activities to contribute to one of the objectives “by ricochet”. This is the case, for example, of an activity that would promote soft mobility such as walking or cycling.
- Transitional activities: these are activities that have a role to play in the ecological transition, those that make it possible to reduce the environmental impact in sectors for which there are no alternatives. For example, gas and nuclear power, which produce electricity, have been integrated into the green taxonomy since January 1, 2023 as such.
As we have just seen, in order to be able to integrate the European taxonomy, economic activity must contribute “substantially” to at least one of the six environmental objectives defined by the EU. But how can you determine if your company's activity meets one of these 6 objectives without harming the others, and can therefore claim to integrate the European green taxonomy? The European Commission has established specific criteria for each type of activity, in order to be able to say whether the activity in question is considered sustainable, or not, within the meaning of the taxonomy.
FOCUS on objectives 1 and 2 “Climate change mitigation” and “Climate change adaptation”: how do you know if your activity meets them?
On 1 January 2022, a first climate component of the European Green Taxonomy came into force: the Delegated Regulation 2021/2139. This text (in Annex 1) lists activities and specifies the technical examination criteria to meet the first two objectives of the taxonomy, namely “climate change mitigation” and “climate change adaptation.”
These criteria therefore make it possible to determine the conditions under which an economic activity is considered to contribute substantially to the mitigation of climate change and to know in which cases the economic activity in question causes significant harm to one of the other environmental objectives.
Among the main categories of activities governed by this text, we find the following:
- Forestry
- Environmental protection and restoration activities
- Manufacturing industries
- Energies
- Water production and distribution, sanitation, waste management and pollution control
- Transports
- Construction and Real Estate Activities
- Information and communications
- Specialized, scientific and technical activities
These broad categories are themselves subdivided into more specific activities. For example, the “Energy” category is subdivided into several types of other activities covered by the regulation: generation of electricity from wind energy, transmission and distribution of electricity, storage of thermal energy, installation and operation of electric heat pumps, etc.
For each type of activity, the regulation specifies: the precise description of the activity to allow you to know if your activity actually corresponds to it as well as the technical examination criteria to be met in order to determine that the activity contributes substantially to the mitigation of climate change without prejudicing the other objectives (i.e. the objectives 3, 4, 5, 6 listed above).
5. CSRD and green taxonomy: What information should companies publish in their extra-financial report?
The CSRD Directive and the Taxonomy Regulation are two important, complex and relatively recent texts. For these reasons, it will be helpful for you to understand how green taxonomy is used in the CSRD framework. And above all, to understand how the link between these two texts takes place, which sometimes seem to overlap.
As a reminder, the CSRD requires companies subject to it to provide a detailed sustainability report on their environmental, social and governance (ESG) impacts. In this context, taxonomy plays a key role in providing a methodology for evaluating and presenting the environmental performance of companies in the report.
What you should remember is that a company subject to the CSRD must take into account the expectations of the green taxonomy in its extra-financial reporting and thus declare whether some of its economic activities are eligible and aligned with this taxonomy.
In concrete terms, this means that:
- Companies subject to the CSRD must use the technical criteria of the taxonomy to be able to identify, among the activities they carry out, which are “sustainable” and therefore eligible to join the European Green Taxonomy. This amounts to measuring the part of their activities that are eligible and aligned with the criteria defined by the European taxonomy. Businesses must also be in a position to provide evidence of compliance with the technical criteria set out in the regulations.
- Once the portion of activities considered sustainable under the Green Taxonomy is determined, companies must measure the percentage of their turnover, capital expenditure (CapEx), operating expenses (OpEx) that are eligible and aligned with the criteria defined by the European Green Taxonomy. Businesses should also be able to specify the methodologies used to arrive at these calculations.
- Finally, the company must report all this information in the sustainability report provided under the CSRD.
Is it necessary to draw up two reports (one on taxonomy and one on extra-financial sustainability)? No, companies do not have to write a separate report for the European Green Taxonomy in addition to the sustainability report provided by the CSRD. However, they must include specific information related to the green taxonomy in their sustainability report.
6. CSRD vs green taxonomy: what are the differences?
Although the green taxonomy and the CSRD are complementary and are articulated at the stage of formalizing the sustainability report, they differ on several points:
What resources are available to me to see things more clearly?
-The official page on the European green taxonomy of the European Commission provides an overview of the framework, objectives and criteria and may be useful to you.
-The European Commission's FAQ on the climate component of the taxonomy can also enlighten you.
CONCLUSION
The European Green Taxonomy is a central pillar of the EU climate strategy.
For businesses, it represents a demanding framework but offering numerous opportunities. Indeed, by understanding its objectives and obligations, you can not only comply with regulatory requirements, but also gain competitiveness and value your environmental commitments to investors and other stakeholders.
Attention all the same, the interconnection between the green taxonomy and the CSRD reinforces the need for companies to have robust and adapted tools to collect, analyze and publish their ESG data. Do not hesitate to contact the Sami teams if you wish to be supported on these various aspects.
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