Education Corner


What is the EU Taxonomy?

The EU’s framework for classifying which economic activities are and are not sustainable

Education corner / Regulation / What is the EU Taxonomy?


The EU Taxonomy is a key component of the Action Plan on Sustainable Finance that aims to identify and direct investment towards economic activities aligned with a net zero by 2050 trajectory.

The taxonomy – officially EU Regulation 202/852 – took effect on 12 July 2020 and accompanies other cornerstones of the Action Plan including the Sustainable Finance Disclosure Regulation (SFDR) and EU Benchmark Regulation.

The regulation acts as a common framework outlining which activities are environmentally sustainable and therefore taxonomy-aligned, with the aims of preventing greenwashing, providing access to green financing and reducing fragmentation within sustainable investments to support the European Green Deal.

Notably, the taxonomy focuses on ‘economic activities’ so it can determine the relative alignment of actors investing in or conducting these activities such as companies, asset managers and investment funds.

Taxonomy alignment of activities is determined by whether they substantially contribute to and do no significant harm to any of the six goals.

These include: 

  • Climate change mitigation 

  • Climate change adaptation 

  • Sustainable use and protection of water and marine resources 

  • Transition to a circular economy 

  • Pollution prevention and control 

  • The protection and restoration of biodiversity and ecosystems 

Key developments

The EU has taken a phased approach to the introduction of its activity classification system, both from a reporting and regulatory perspective. 

For instance, the taxonomy requires non-financial reporting companies with more than 500 employees to disclose the proportion of their activities that are taxonomy-aligned in their turnover, capital expenditure and operating expenditures. 

They also need to provide descriptions of how these metrics are calculated and why, where relevant, there are changes in performance. 

However, the European Commission implemented a staggered approach to its requirements, with companies only having to disclose what portion of their economic activities were eligible in relation to the Climate Delegated Act segment of the taxonomy within the first year.

The following year, this was extended to cover alignment, with companies required to provide three-part tables illustrating for each activity, which of each financial metric is taxonomy-aligned, taxonomy-eligible but not aligned and non-taxonomy-eligible. 

Financial companies were given until the 2023 fiscal year before reporting was made mandatory, given they need to disclose data from their non-financial and financial counterparties and constituents. 

Outside of disclosure requirements, the taxonomy has also taken a phased approach to defining the universe of sustainable activities. 

For instance, the EU introduced the Complementary Climate Delegated Act on 1 January 2023 to earmark activities which play a transitional role with decarbonisation.

This included the addition of some nuclear energy and natural gas subsectors as ‘amber’ rather than ‘green’ activities, with the technical screening criteria and time limits for the contribution of these activities reviewed every three years.

Impact on ETFs

Although taxonomy reporting is required for all financial products offered and distributed in the EU including UCITS vehicles, the practical impact of the framework on ETFs was limited within its early years.

In fact, MSCI ESG Research from 2023 found the majority of SFDR Article 8 and Article 9 ETFs had stated “no intent” regarding their alignment in European ESG Template (EET) reporting, despite being marketed as ESG or impact investment vehicles.

After four years, company data disclosure volumes for taxonomy eligibility and alignment criteria remain low.

While this explains why the providers of investment funds such as ETFs are reluctant to declare what portion of their products’ underlying investments are aligned, this presents a challenge to mandates and institutional investors that may require a minimum threshold of EU Taxonomy alignment across their portfolios.

Key takeaways

  • The EU Taxonomy determines whether activities are sustainable according to its six key goals

  • Implementation of data reporting requirements and inclusion of new activities have been staggered

  • ESG ETF issuers remain reluctant to declare the taxonomy alignment of their products

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