The European Commission unveiled a broad set of frequently asked questions (FAQs) on the EU Taxonomy. The initiative aims to ease the implementation of this classification system, designed to define and promote sustainable economic activities. According to the Commission, this move forms part of a larger effort to streamline the application process for the Taxonomy and reduce administrative burdens for companies that abide by the EU’s sustainable finance framework.
The EU Taxonomy is a core component of the EU Action Plan on Sustainable Finance, providing a structured methodology for categorizing economic activities that significantly contribute to at least one of six established environmental objectives. Importantly, these activities must also ensure that they do not cause significant harm to any of the remaining objectives, a principle known as “Do No Significant Harm” (DNSH).
The six environmental objectives as provided in the Taxonomy are climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. By defining these objectives, the Taxonomy seeks to align economic activities with the EU’s broader sustainability goals, providing investors with a robust framework for identifying environmentally impactful investments while encouraging companies to accelerate their transition to sustainability.
Having entered into force in 2022, the Taxonomy initially only applied disclosure requirements to the first two objectives, that are climate change mitigation and climate change adaptation, through the EU Taxonomy Climate Delegated Act. The disclosure obligations have since become effective for the remaining four objectives from the beginning of 2024, by virtue of the Environmental Delegated Act.
The recently issued FAQs are dedicated to several key elements of the EU Taxonomy. Most importantly, these questions relate to making the instrument more helpful for companies and investors in general. Areas include basic requirements for the Taxonomy, interoperability with ESRS of CSRD European Standards for Sustainability Reporting, and specific requirements on the verification and assurance procedures relevant for compliance with the framework.
An important area of focus within the FAQs relates to the technical screening criteria, which outline requirements for different economic activities in terms of whether they should qualify as sustainable under each of the six environmental objectives. Such criteria provide a benchmark that indicates whether the activities make a meaningful contribution to sustainability while maintaining the DNSH principle. The FAQs also clarify reporting obligations according to the Climate and Environmental Delegated Acts, making them clearer for companies to know where they stand.
There is an entire dedicated section in the document explaining DNSH criteria, an important element of the Taxonomy framework. The DNSH principle helps avoid unintended harmful effects that one environmental objective may cause on other objectives. With these FAQs addressing common questions and challenges companies face when implementing DNSH, the practical guidance given to companies to help them navigate this complex requirement will be of significant assistance.
The Commission has also stressed the interoperability of the EU Taxonomy with other major sustainability initiatives, such as the CSRD and its associated ESRS. This interoperability is expected to help in the smooth reporting processes for companies and enhance the consistency of sustainability disclosures within the EU.
Mairead McGuinness, Commissioner for Financial Services, Financial Stability, and Capital Markets Union, stressed that the FAQs bring added value in promoting the use of the EU Taxonomy. “The EU Taxonomy provides investors with a common understanding of the environmental impacts of their investments while guiding companies’ sustainable transition efforts,” she said. “Our focus now is on making the framework more user friendly, and these FAQs will assist companies as they apply the Taxonomy.”
Publication of FAQs: A major step towards refinement and supporting the implementation of the sustainable finance framework by the EU. By answering the practical challenges and giving clear understanding about technical and regulatory matters, the Commission aims to create better adoption of the Taxonomy and support the economy toward sustainability.
As the EU continues in its pursuit of sustainability through advancing its agenda, it will be important for the Taxonomy to continue playing the role of realigning economic activities to environmental goals, empowering investors to be informed, and enabling firms to demonstrate commitment to sustainable activities. It is upon this that new FAQs can play a great role and help in achieving such goals toward ensuring that the framework becomes accessible, transparent, and effective for all stakeholders involved.