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Glossary
EU Taxonomy Regulation

EU Taxonomy Regulation

The EU Taxonomy Regulation is a classification system created by the European Union to provide a clear definition of which economic activities are environmentally sustainable. Its primary goal is to prevent "greenwashing" and direct investments towards projects that genuinely contribute to a low-carbon and resource-efficient economy.

The EU Taxonomy Regulation is a cornerstone of the EU's Sustainable Finance Action Plan, designed to provide transparency and a common language for sustainable investment. It acts as a science-based dictionary or "green list," establishing precise criteria that companies and investors must use to identify activities that can be considered environmentally sustainable. By creating this standardized framework, the regulation helps investors, companies, and policymakers make informed decisions and confidently channel capital towards a sustainable future.

This regulation is critical for financial market participants, including asset managers and investment platforms like Homaio, as well as large companies that are required to disclose information under the Corporate Sustainability Reporting Directive (CSRD).

For an economic activity to be officially "Taxonomy-aligned," it must meet three key conditions:

  • Make a substantial contribution to at least one of the six environmental objectives.
  • Do No Significant Harm (DNSH) to any of the other five objectives.
  • Meet minimum social safeguards (e.g., OECD Guidelines for Multinational Enterprises).

The six environmental objectives defined by the EU Taxonomy are:

  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

Concrete Examples

  • Climate Change Mitigation: A company operating a wind farm is contributing substantially to climate change mitigation (Objective 1). To be fully Taxonomy-aligned, it must also prove it does no significant harm to local ecosystems (Objective 6) and manages its water use responsibly (Objective 3).
  • Transition to a Circular Economy: A manufacturing firm that redesigns its production process to use 90% recycled materials for its products would be contributing to the transition to a circular economy (Objective 4). The firm would still need to demonstrate that its operations don't, for example, cause significant air or water pollution (Objective 5).

The Taxonomy provides the "what" (what is green), while other regulations like the EU ETS provide the "how" by creating market incentives.

Other terms

ESRS

Green Bond