Skip to content

What the EU Taxonomy Means for Your Business: A Practical Guide

The EU Taxonomy is designed to direct financial investment towards economic activities that support a sustainable future. It establishes criteria and a common definition for what counts as a “sustainable” activity, aligned with transitioning to a Net Zero future and other environmental goals. Learn more about how this criteria drives more sustainable investing across both the financial sector and companies’ strategies.  

The European Union is taking decisive action to combat climate change, and financial investment plays a crucial role in this mission. One of the key tools in this area is the EU Taxonomy – a comprehensive framework designed to define and standardise what constitutes a sustainable economic activity.  

Understanding the EU Taxonomy helps companies to access external investment by demonstrating their plans are aligned with a sustainable future. This is a growing expectation among financial stakeholders, who are also required to align their funding strategies and decisions to the Taxonomy. 

Who the EU Taxonomy applies to 

The EU Taxonomy is essentially a classification system for sustainable economic activities. By creating common definitions and language around sustainability and sustainable projects, it channels investments into genuinely green projects, helps investors make genuinely sustainable investment decisions and combats greenwashing.  

While the Taxonomy primarily impacts financial institutions like banks and insurers, it also affects companies seeking to secure capital or those operating in sectors deemed sustainable. Company strategies, goals and projects must meet four conditions across six environmental objectives such as climate change mitigation and biodiversity protection. 

Taxonomy

The Taxonomy is closely linked with the EU’s Sustainable Finance Disclosure Regulation (SFDR). The SFDR requires financial entities, such as asset managers and investment banks, to report on their sustainable finance activities in line with the standards and criteria established by the Taxonomy.

This linkage underscores the EU’s commitment to transparency and accountability in sustainable finance, providing a robust framework for businesses and investors alike. Aligned investments grew by more than 30% from 2022 to 20231 – reflecting investors’ increasing appetite for funding sustainable growth. 

Understanding the EU Taxonomy: Key features 

Four conditions 

A goal, activity or project must meet all four of these conditions to qualify as sustainable in line with the Taxonomy. 

  • Make a substantial contribution to one or more of the six environmental objectives (see below) 
  • Do no significant harm to any of the other environmental objectives  
  • Comply with minimum safeguards for responsible, ethical conduct 
  • Comply with the relevant technical screening criteria 

Learn more with the European Commission’s EU Taxonomy Navigator

Six 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 

Your supply chain may play a significant role in your company’s ability to align activities with these environmental objectives. Capturing environmental data from suppliers brings multiple benefits – learn more here.   

Why align your business activities to the EU Taxonomy? 

Improved access to capital: Aligning projects with the Taxonomy makes a company more attractive to investors who are keen on sustainable investments, and helps investors to easily see that a company’s activities are genuinely sustainable. This alignment can unlock new funding opportunities and reduce the cost of capital. 

Enhanced risk management: The Taxonomy aids in identifying and managing climate-related risks within operations and supply chains. This proactive approach to risk management can safeguard businesses against potential operational and regulatory pitfalls. 

Driving innovation: Embracing the Taxonomy can drive innovation, as companies develop new and more sustainable products or services aligned with its standards. This opens up new markets and growth opportunities for businesses, as well as supporting regulatory compliance and satisfying consumer demands for more sustainable items.  

Compliance with related legislation: Companies face a plethora of new laws around the world on corporate sustainability and supply chain due diligence. By developing projects and products that meet the Taxonomy’s criteria, companies can be confident these activities will also meet the requirements outlined in laws such as the EU’s Corporate Sustainability Reporting Directive. 

Practical next steps for businesses 

Assess your growth plans and think strategically 
View the Taxonomy as an opportunity rather than a regulatory hurdle. Strategic alignment can enhance your competitive edge and drive long-term business success by meeting both evolving regulatory requirements and investor expectations for sustainable economic growth.  

Begin by identifying which of your business activities align with the Taxonomy. This assessment is crucial in understanding where you stand and what adjustments are necessary. Adapt your plans with support from Sedex Consulting – our team of experts can assist across programme development, sustainability initiatives, transition planning and compliance. 

Data driven approach

Transparency and data-based evidence 
Develop a clear and effective communication strategy around your company’s alignment with the EU Taxonomy. Ensure it is clear to investors how targets, strategies and project delivery meet the four conditions and support one or more of the environmental objectives. This transparency builds trust and confidence with stakeholders, and will support with the sustainability-related reporting requirements under various laws.  

It’s also important to gather the requisite data to enable this transparency, credible communications and regulatory compliance. With accurate and comprehensive data regarding environmental risks, practices and management, your company can demonstrate progress towards its environmental goals and help stakeholders including investors to validate the alignment with the EU Taxonomy. 

Incorporate supply chain data to demonstrate in-depth analysis of environmental risks and opportunities – this is particularly essential for goals such as mitigating climate change (including through reducing Scope 3 emissions) and transitioning to a circular economy. Our intelligent Platform enables environmental data capture and assessment on a global scale, both with and without supplier data.  

The EU Taxonomy represents a significant shift in how investors approach sustainable finance and decision-making. Early preparation and strategic alignment with this framework can position your company for success in a rapidly evolving market.

Discover the power of supply chain data and Sedex’s integrated platform to empower your environmental goals.