The EU taxonomy for sustainable activities, also called a "green taxonomy," is a system that groups economic activities to show which ones are environmentally friendly. It was created as part of the European Green Deal. The purpose of the taxonomy is to stop misleading claims about environmental benefits and to help investors choose investments that support sustainability. The taxonomy includes activities that help achieve six environmental goals: reducing climate change, preparing for the effects of climate change, moving toward a circular economy, preventing pollution, protecting water and ocean resources, and preserving and restoring nature and ecosystems. The taxonomy started being used in July 2020. The UK is developing its own separate system for classifying sustainable activities.

General overview

The European Union (EU) Taxonomy was created as part of the European Green Deal initiatives. The EU started the European Green Deal to meet the goals of the Paris Agreement, which aims to create an economy that does not produce carbon emissions by 2050. The European Green Deal is based on a plan to strengthen funding for sustainable growth, with the goal of changing how money is invested to support environmentally friendly projects. Sustainable finance is a key part of the European Green Deal. It requires businesses and investors to direct their money toward activities that help the environment. To achieve these goals, the European Commission (EC) encourages investments in projects that support sustainability. This plan led to the creation of the EU Taxonomy.

The EU Taxonomy is a system that classifies certain economic activities based on how well they protect the environment. It helps companies determine how much of their business is focused on sustainability. The EU Taxonomy Regulation was officially published on June 22, 2020, after being approved by the European Parliament on June 18, 2020. It became active on July 12, 2020. Today, the EU Taxonomy is considered an important tool that helps the financial system move money toward a low-carbon economy that follows the Paris Agreement. Testing of the Taxonomy has been done in both private and public sectors, including the European Investment Bank and BNP Paribas asset management.

Work to create the Taxonomy began in 2018, when the European Commission formed a Technical Expert Group (TEG) on Sustainable Finance. The TEG helped develop the Taxonomy, with the OECD as an observer. The TEG’s main job was to create rules to decide if an activity is environmentally sustainable. In late 2018, the TEG published its first report, which included early rules for activities that help reduce climate change. This was one of six environmental goals of the Taxonomy. The report also asked for feedback on the rules and how useful the Taxonomy might be. In March 2020, the TEG published its final report, which included responses to the feedback, advice for the Commission on designing the Taxonomy, a guide for users on how to share information, and recommendations for the Platform on Sustainable Finance, which had not yet been created. The final report included updated rules for determining if an activity helps reduce climate change and new rules for activities that might be added to the Taxonomy in the future. The TEG’s work was extended until September 2020 because of the large amount of feedback received. After the final report was published, the TEG continued to advise until the Platform on Sustainable Finance was ready.

Even though the EU Taxonomy has the potential to support sustainable finance, it is not required. It is available for companies and investors who want to improve their environmental performance and use it as a flexible framework. For those who use the Taxonomy, it provides clear and consistent goals that help define what activities are considered environmentally friendly and part of the EU’s environmental goals. In July 2018, the TEG was assigned to create the first version of rules for assessing activities. These rules were made to match the EU’s climate goals. This work led to the first proposal for the EU Taxonomy in March 2020. This proposal identified six environmental goals that an activity must meet to be included in the Taxonomy. The six goals are:

• Reducing climate change
• Adapting to the effects of climate change
• Using and protecting water and ocean resources in a sustainable way
• Moving toward a circular economy (a system where resources are reused)
• Preventing and controlling pollution
• Protecting and restoring nature and ecosystems

For an activity to be certified as environmentally sustainable under the Taxonomy, it must make a major contribution to at least one of the six goals and not cause major harm to the other five. This principle is called "Do No Significant Harm" (DNSH). In addition to the six goals, the EU Taxonomy sets four requirements that an activity must meet to be included:

• Making a major contribution to at least one environmental goal.
• Not causing major harm to any other environmental goal.
• Following basic rules that protect people’s rights.
• Meeting technical rules that assess whether an activity is sustainable.

The main actors involved in the lawmaking process

The main groups involved in creating the Taxonomy are responsible for different tasks during the process. These groups include:

• the European Commission,
• the Technical Expert Group on sustainable finance (TEG),
• the Member States Expert Group on sustainable finance (MSEG),
• the Platform on Sustainable Finance,
• the European Parliament, and
• the Council.

The TEG had 35 members from different backgrounds, such as business groups and environmental organizations. It was mainly responsible for preparing recommendations to the European Commission about the overall structure of the Taxonomy and the technical rules used to evaluate activities. Based on these recommendations, the Commission created a proposal for the Taxonomy Regulation. This proposal was approved by the European Parliament and the Council through a standard process that allows both groups to suggest changes before final approval.

After the Taxonomy Regulation was approved, the Commission proposed three Delegated Acts (DAs). Before proposing these DAs, the Commission had to consult with the MSEG and the Platform on Sustainable Finance (PSF). The MSEG includes representatives from each Member State, with two members from each country. The PSF has 57 members from diverse groups, including businesses and environmental organizations.

During the review of the Complementary Climate Delegated Act, which included nuclear and gas in the Taxonomy, the PSF provided negative feedback. Different Member States in the MSEG had varying opinions about this inclusion. The purpose of the DAs is to set technical rules, such as the criteria used to determine if activities meet the Taxonomy standards. Once the DAs are proposed, the European Parliament and the Council cannot suggest changes. Their only option is to reject the entire DA. This means they are only involved later in the process and have no influence over the content of the DAs, which is mainly decided by the Commission and the expert groups.

Some people have raised concerns about the democratic legitimacy of the DAs. According to Article 290 of the Treaty on the Functioning of the European Union (TFEU), the European Parliament and the Council can only allow the Commission to create DAs to make small changes to non-essential parts of a law. However, critics argue that the content of the DAs is an essential part of the Taxonomy. The Austrian government expressed concerns about the lack of time given to the MSEG and PSF for consultation, as well as the absence of public feedback and an analysis of the effects of including gas and nuclear in the Taxonomy. Similar concerns were raised by the European Parliament, which said it did not have enough time to review the third DA.

Delegated Acts

The Taxonomy Regulation gives the Commission the authority to create delegated acts after consulting the Platform on Sustainable Finance and the Member States Expert Group on Sustainable Finance. Since the Regulation became effective, the Commission has created four delegated acts.

The Climate Delegated Act was created in June 2021 and published in the Official Journal in December 2021. It sets technical standards to determine if an economic activity significantly helps reduce or adapt to climate change. Although there was much discussion about whether nuclear power and natural gas could be considered green investments, neither is labeled as a green asset in the first delegated act. The act mentions that nuclear energy is still being evaluated, and natural gas may be included in a future act if it meets the requirements for a transitional activity.

The Disclosures Delegated Act was created by the Commission in July 2021 and published in the Official Journal in December 2021. It adds details to Article 8 of the Taxonomy Regulation, explaining the type of information, methods, and format that financial and non-financial companies must share. It helps companies meet their disclosure requirements by turning technical screening standards into key performance indicators related to revenue, capital spending, and operating costs. The specific requirements are listed in the annexes of the act and may vary depending on the type of company (financial or non-financial) and the kind of financial entity (e.g., asset managers, credit institutions, investment firms, insurance companies).

The Complementary Climate Delegated Act was approved in principle by the Commission in February 2022 and officially adopted on May 9, 2022, after translations were completed in all EU languages. It was then sent to co-legislators for review, which ended on July 11, 2022, with no objections. The act was published in the Official Journal on July 15, 2022, and will take effect on January 1, 2023. This act has caused the most debate and has reignited discussions about including nuclear energy and natural gas in the taxonomy. The act adds certain gas and nuclear activities as transitional activities that help reduce climate change. This decision followed reports from the TEG in 2019 and the JRC in 2021, as well as consultations with the PSF and the Member States Expert Group, which led to different conclusions. A vote in the European Parliament to reject the act did not achieve the required majority.

The Environmental Delegated Act, which covers the remaining four environmental goals in the EU Taxonomy, was officially published in the Official Journal of the European Union on November 21, 2023. It outlines technical screening criteria for economic activities related to the following goals: I) Sustainable use and protection of water and marine resources; II) Transition to a circular economy; III) Pollution prevention and control; and IV) Protection and restoration of biodiversity and ecosystems. This act became effective on January 1, 2024.

Applicability for banks

The European Banking Authority (EBA) is explaining how the taxonomy applies to commercial banks. In March 2021, the EBA suggested that banks must report a "green asset ratio" and other key performance indicators (KPIs) starting in 2024. Reporting about the taxonomy has been added to the "Pillar 3" requirements for banks. Banks will also need to share information about energy efficiency in their mortgage portfolios.

Early estimates show that EU banks had an average green asset ratio of 2.23%.

Debate over natural gas and nuclear energy

The classification of fossil gas and nuclear energy in the EU's green taxonomy has been a topic of debate. This discussion was influenced by two reports before the Complementary Climate Delegated Act was created. One report was from the Technical Expert Group (TEG), which included experts from the finance sector. The other was from the Joint Research Centre (JRC), which provides scientific advice to EU policies and researches nuclear safety for Euratom. In its report, the TEG stated that nuclear energy could help reduce climate change but recommended not including it in the taxonomy at that time, due to challenges in determining whether it meets the "do no significant harm" principle.

The JRC report concluded that, with current technologies and regulations, nuclear energy's impact would stay below harmful levels. This report was reviewed by a Commission Expert Group, which approved it, but the Scientific Committee on Health, Environmental and Emerging Risks (SCHEER) criticized the method used to assess the "do no significant harm" principle. The Platform on Sustainable Finance (PSF), which includes groups, NGOs, and international institutions, expressed concerns about including nuclear energy in the taxonomy, stating that nuclear activities do not fully meet the "do no significant harm" principle. The PSF also noted that technical criteria for new nuclear plants would apply to those receiving construction permits by 2045. This could mean that nuclear projects starting too late might fail to help achieve climate neutrality by 2050.

Regarding fossil gas, the PSF suggested keeping only a threshold for greenhouse gas (GHG) emissions in the taxonomy, allowing some high-emission activities to be labeled as "intermediate transition" activities, even if they are not fully sustainable. In 2015, fossil gas made up 22% of Europe's energy mix, while nuclear energy accounted for 13.6%.

Some countries view fossil gas as a temporary step between coal and renewable energy, arguing it should be considered sustainable under certain conditions. Germany strongly supported including gas in the taxonomy and asked the EU to ease environmental rules on its use. However, the Netherlands, Austria, Sweden, and Denmark opposed its inclusion.

For nuclear energy, concerns about safety and waste disposal led Spain, Belgium, and Germany to plan to phase out nuclear power in the coming years. Belgium later delayed its phase-out by ten years after Russia's invasion of Ukraine. A group of four countries—Spain, Denmark, Austria, and Luxembourg—criticized the EU's plan to include nuclear and gas in the taxonomy, with Austria and Luxembourg threatening legal action if the EU proceeded.

France, along with Bulgaria, Croatia, Czechia, Finland, Hungary, Poland, Romania, Slovakia, and Slovenia, supports including nuclear energy in the taxonomy. These countries' ministers published a joint article in 2021, arguing that nuclear energy helps fight climate change and stabilizes energy prices, as nuclear costs are more predictable than gas, which is often imported. Finland and Sweden also asked the EU to remove deadlines for nuclear investments and criticized strict waste disposal rules, claiming they do not reflect recent advancements in their countries.

FORATOM, which represents the European nuclear industry, supported including nuclear energy in the taxonomy, arguing it should not be seen only as a temporary solution and should remain part of the EU's energy mix beyond 2050. EUROGAS, which represents the gas sector, emphasized the importance of investing in gas infrastructure to support the energy transition and pushed for such investments to be labeled as sustainable.

The EU Commission included both nuclear and gas in the taxonomy in one act, allowing member states and the European Parliament to reject the entire proposal or accept it. This led the Commission to officially propose including both energy sources in the taxonomy in February 2022.

On 6 July 2022, the European Parliament voted against a resolution to reject the Third Delegated Act on including nuclear and gas in the taxonomy. The vote received 278 votes in favor, though an absolute majority of 353 was needed to pass the resolution.