EU Simplifies Sustainability Taxonomy Compliance Rules

In a key step towards establishing a more business-friendly and efficient sustainability reporting regime, the European Commission has made surprise overhaul announcements to the EU Taxonomy Regulation. The new rules will simplify the use of the sustainability taxonomy, minimize administrative costs on businesses, and generally enhance ease. These reforms, as part of the broader Omnibus I package unveiled at the beginning of this year, will come into force from January 2026, for the financial year 2025.

The EU Taxonomy is the foundation of the EU Action Plan on Sustainable Finance, to guide and direct investment towards environmentally sustainable activity. It offers a science-based system of classification that can be used to identify economic activities that contribute significantly to achieving at least one of six environmental goals without contributing significantly to damaging any of the other six. These six environmental objectives are climate change mitigation, climate change adaptation, sustainable marine and water resource protection and utilization, transition to a circular economy, pollution control and prevention, and protection and restoration of biodiversity and ecosystems.

Since its launch, the taxonomy has sought to guide capital toward sustainable projects by providing investors, companies, and policymakers with transparency and consistency. Many companies, however, including small and medium-sized businesses, have complained about the complexity and administrative burden of taxonomy reporting, which has led to calls for overhaul.

Issues having already been addressed, the new European Commission move introduces a series of key simplifications. The most significant change is the exclusion of companies from taxonomy alignment testing for non-material economic activities. For non-financial corporates, it implies that activities of less than 10% revenue, capex, or opex will not be tested for taxonomy alignment anymore. In the same manner, in financial institutions, non-material activities are financial products that are less than 10% of loans and investments for identified proceeds use of some economic activities. Where unidentified is the use of proceeds, entities may make use of the taxonomy key performance indicators (KPIs) of the lending or investee entity.

This shift is likely to ease the compliance burden for companies quite considerably by allowing them to concentrate only on material aspects of their enterprise. This also introduces some flexibility for financial institutions while considering complicated investment portfolios or lending.

Additional relief is extended to non-financial firms in operating expenses reporting. With the new rules, when opex is deemed immaterial to the business model of the company, the company will no longer need to determine taxonomy eligibility or alignment. It will simply need to report its quantum of opex and the rationale behind its materiality assessment. This move from a hard, detailed reporting requirement to a softer, materiality-based narrative one is intended to ensure maximum simplicity and minimum effort.

If the most effective streamlining happens with the very severe reduction in datapoints needed in taxonomy reporting templates, then it has to be the datapoint reduction by 64% for non-financial firms with financial firms needing an even more dramatic cut by 89%. This intensive-cut datapoint reduction in reporting needs has to relieve the burden on sustainability teams as well as lower the compliance cost with taxonomy.

The new regulations also bring in additions to the green asset ratio (GAR), meaning the percentage of assets of a financial institution that are taxonomy-compliant. The GAR adjustment aims to simplify the way in which financial companies calculate and report their taxonomy-compliant exposures and investments. Moreover, the new rule streamlines the "Do No Significant Harm" (DNSH) tests for prevention and pollution control, specifically for the occurrence and usage of hazardous chemicals, in order to make the provisions more feasible and easier to apply.

These changes must undergo a four-month examination phase in the European Parliament and Council before they can be enacted into law that can be extended to a further two months. All going well, the new taxonomy regulation will start in 2026.

Naming the importance of the step, Commissioner for Financial Services and the Union of Savings and Investments Maria Luís Albuquerque underlined the need to find a balance between sustainability and real action. "Today we make a clear step towards a more growth-friendly, usable and proportionate sustainable finance regime," she said. Our decisions make it simpler to use the EU Taxonomy and obtaining the right balance between not burdening our businesses too much with administrative tasks, yet still keeping our longer-term ambitions in mind, such as reaching a sustainable economy.

Such reforms are all part of the wider move by the EU towards sustainability regulation—both to further environmental goals but to ensure that businesses, small and medium enterprises, and financial institutions are not swamped by over-regulation. By intervening in the taxonomy regime, the Commission aims to enhance investor confidence, enhance corporate engagement in sustainable finance, and further establish the EU as a beacon for green economic transformation.