The EU Taxonomy Regulation is a key component of the European Union’s Green Deal, designed to guide investors, businesses, and policymakers in identifying environmentally sustainable economic activities. By setting clear criteria for what qualifies as sustainable, the Taxonomy aims to regulate greenwashing, ensure transparency in financial markets, and attract capital towards truly sustainable investments.

As part of the EU’s broader sustainable finance agenda, the Taxonomy complements initiatives such as the Ecodesign for Sustainable Products Regulation (ESPR) and the Corporate Sustainability Reporting Directive (CSRD). Together, these policies aim to realign the financial system with the EU’s climate and environmental goals, reinforcing the commitment to climate neutrality by 2050.

In this article, we will break down the main features of the EU Taxonomy regulation and discuss its potential modifications in light of the new EU Omnibus Regulation proposal.

What is the EU Taxonomy?

The EU Taxonomy is essentially a classification system that defines whether an economic activity is environmentally sustainable based on six key environmental objectives:

• Climate change mitigation
• Climate change adaptation
• Sustainable use and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems

For an activity to qualify as aligned with the EU Taxonomy, it must substantially contribute to at least one of these objectives without significantly harming any of the others. The regulation also establishes minimum social safeguards, ensuring compliance with human rights and labour standards.

By defining clear sustainability standards, the EU Taxonomy ensures that financial and corporate activities genuinely contribute to the green transition. This classification system provides investors, businesses, and policymakers with a credible, science-based tool to evaluate environmental impact, reduce greenwashing, and direct capital toward truly sustainable initiatives.

The EU Taxonomy has garnered significant attention recently, as it is one of the legislations included in the EU Omnibus proposal. The proposal seeks to simplify the means of EU corporate sustainability reporting.

The main changes proposed regarding the EU Taxonomy concern its obligatory nature and the extent of the reports. Firstly, the proposal aims to make the regulation a voluntary scheme. If passed, it would mean that companies can choose to opt in on reporting on their sustainable economic activity. The actual reports themselves are aimed to be simplified, although the specifics have not yet been released.

What is the scope of the EU Taxonomy, and who is affected?

The EU Taxonomy Regulation applies to a wide range of entities, particularly those involved in finance, corporate reporting, and investment decision-making. Until the changes proposed by the EU Omnibus are approved and officially adopted into domestic legislation, the following scope remains applicable. 

The main groups impacted include the following:

• Large companies: Businesses that are subject to the Corporate Sustainability Reporting Directive (CSRD) disclose how their activities align with the Taxonomy framework.
• Financial market participants: Asset managers, banks, insurance companies, and other institutions offering financial products in the EU must evaluate and report on the sustainability of their investments.
• Listed companies: Publicly traded firms must adhere to enhanced disclosure requirements to ensure transparency on sustainability claims.
• EU member states & public authorities: Governments may integrate Taxonomy criteria into public funding, procurement, and policymaking to ensure alignment with sustainability goals.

By targeting these key actors, the EU Taxonomy aims to redirect capital towards environmentally sustainable activities, thereby helping to drive the transition to a climate-neutral economy by 2050.

What makes an economic activity environmentally sustainable?

For an economic activity to be classified as environmentally sustainable under the Taxonomy, it must meet three core criteria:

1. Substantial contribution: The activity must make a significant contribution to at least one of the six environmental objectives.
2. Do no significant harm (DNSH): It must not cause major harm to any of the other five objectives.
3. Minimum social safeguards: Companies must comply with labour and human rights standards, including those set by the OECD Guidelines and the UN Guiding Principles on Business and Human Rights.

How can companies implement the EU Taxonomy objectives?

As mentioned above, EU Taxonomy consists of objectives to make business operations within the EU more sustainable, efficient and aligned with the goals of the EU Green Deal and the Circular Economy Action Plan. 

Here are practical examples of how businesses can implement the Taxonomy objectives into their operations to be compliant with the regulation:

1. Climate change mitigation
   
   • Activities that help reduce greenhouse gas (GHG) emissions or support the transition to a low-carbon economy.
   • Examples: Renewable energy, energy efficiency, carbon capture and storage.
2. Climate change adaptation
   
   • Actions that increase resilience to climate change risks, such as extreme weather events or rising temperatures.
   • Examples: Flood protection systems, climate-resilient infrastructure, drought-resistant agriculture.
3. Sustainable use and protection of water & marine resources
   
   • Measures that prevent water pollution and protect aquatic ecosystems.
   • Examples: Water treatment facilities, sustainable fishing, and marine biodiversity conservation.
4. Transition to a circular economy
   
   • Activities that reduce waste, enhance recycling, and promote resource efficiency.
   • Examples: Eco-friendly product design, sustainable packaging, waste-to-energy solutions.
5. Pollution prevention and control
   
   • Initiatives that minimise air, water, and soil pollution through cleaner technologies.
   • Examples: Air filtration systems, non-toxic material production, and emission reduction technologies.
6. Protection and restoration of biodiversity and ecosystems
   
   • Projects that restore natural habitats, protect forests, and enhance biodiversity.
   • Examples: Reforestation programs, conservation agriculture, and sustainable forestry.

While implementation of as many as possible is encouraged, following merely one of these principles is sufficient, as long as other business activities do not significantly harm the other principles.

What are the EU Taxonomy timeline and compliance deadlines?

The EU Taxonomy Regulation was adopted in July 2020, and its implementation has been rolled out in phases. The first set of Taxonomy Technical Screening Criteria was introduced in December 2020, covering climate change mitigation and climate change adaptation objectives. 

From January 2022, financial market participants and large companies, particularly those covered by the Non-Financial Reporting Directive (NFRD), were required to begin reporting on how their investments align with the Taxonomy, focusing on climate-related objectives. 

By January 2023, companies were expected to expand their disclosures to include additional objectives like water protection, circular economy, and biodiversity. As the Taxonomy evolves, more economic activities will be included, particularly those supporting the green transition. Further refinements are anticipated with the EU Omnibus Regulation proposal. 

Challenges and opportunities of the EU Taxonomy

Implementing the EU Taxonomy Regulation presents several challenges for companies, particularly in terms of data collection and reporting. The need to gather accurate, standardised data across the global value chain operations can be resource-intensive, especially for smaller enterprises lacking the necessary infrastructure. Moreover, this can further lead to supplier fatigue and confusion due to the lack of clear guidelines and data collection methods, which can in turn lead to increased costs and administrative errors.

The administrative burden associated with compliance is another significant concern. Companies are required to provide extensive proof of compliance, which can be particularly challenging for smaller suppliers who may lack the resources to adapt to changing standards and technologies. This situation has led to calls from various stakeholders for simplification of the regulatory framework to alleviate these burdens. 

The Omnibus proposal aims to revise key elements of the EU Taxonomy, most notably by making it a voluntary rather than mandatory regulatory framework. This change would mean companies only need to report if they choose to opt in, and even then, the reporting requirements would be simplified, although the extent of that simplification has yet to be defined.

Even if the EU Taxonomy reporting becomes voluntary due to the EU Omnibus proposal, many companies may still find strategic value in opting in. Here are several compelling reasons why:

1. Investor confidence and access to capital
   By aligning with the EU Taxonomy, companies provide investors with clear, credible information about their environmental performance. This can attract sustainability-focused investors and potentially lower capital costs.
2. Reputation and brand value
   Voluntary reporting signals a strong commitment to sustainability and transparency. This can enhance a company's brand image, stakeholder trust, and customer loyalty, especially in ESG-sensitive markets.
3. Market differentiation
   In competitive industries, voluntarily aligning with the taxonomy can set a company apart from peers who choose not to report, positioning it as a leader in environmental responsibility.
4. Preparedness for future regulation
   Voluntary reporting builds internal capacity and familiarity with ESG frameworks, putting companies ahead of the curve if reporting becomes mandatory in the future or in other jurisdictions.
5. Better internal decision-making
   Engaging with the taxonomy framework can help companies identify environmental risks and opportunities, driving more informed and sustainable business strategies.
6. Customer and supply chain pressure
   Large buyers, especially in Europe, may require or prefer suppliers that disclose under the taxonomy, making voluntary participation a competitive advantage in B2B relationships.

To navigate the challenges of data collection, reporting, and supplier fatigue from the diverse regulations companies are subject to, companies can adopt digital solutions that enhance efficiency, transparency, and compliance. Digital product passport (DPP) store key environmental and lifecycle data, automating data capture and standardising reporting to ease administrative burdens and improve supply chain insight. 

At the same time, Circularise’s blockchain-based traceability platform offers a secure way to track sustainability metrics while safeguarding sensitive business data. Already used in sectors like plastics, chemicals, and batteries, these tools empower companies to meet regulatory demands and advance their sustainability goals. As regulatory demands continue to evolve, leveraging these technologies will be essential for maintaining compliance, improving supply chain collaboration, and driving sustainable investment.

Conclusion

The EU Taxonomy Regulation is a strategic framework designed to direct capital and corporate action toward a truly sustainable economy. By offering a science-based, transparent system to define what counts as environmentally sustainable, the Taxonomy curbs greenwashing, builds investor trust, and helps align private sector efforts with the EU’s climate neutrality goals for 2050.

Though the proposed EU Omnibus Regulation may ease reporting obligations by making them voluntary and streamlining disclosures, this should not be mistaken for a signal to step back. On the contrary, companies that proactively engage with the Taxonomy stand to gain: they strengthen credibility with stakeholders, sharpen ESG capabilities, and position themselves ahead of future regulatory shifts.

Moreover, in an increasingly competitive and sustainability-driven market, early adopters of the Taxonomy can distinguish themselves as leaders in environmental responsibility and innovation. Transparent reporting demonstrates a proactive stance on climate action and responsible governance, traits that are becoming increasingly essential for securing long-term stakeholder trust and access to capital. 

Ultimately, engaging with the EU Taxonomy, even on a voluntary basis, offers companies a powerful opportunity to drive environmental impact, improve operational resilience, and contribute to the broader green transition. As sustainable finance becomes the norm, aligning with the EU Taxonomy today is an investment in the business and regulatory landscape of tomorrow.