Getting Started with the EU Taxonomy: From Complex Legislation to Concrete Impact

The EU Taxonomy is playing an increasingly important role in sustainability reporting. But what exactly is it, what does it mean for your organization, and how do you apply it? In this article, we provide you with a clear overview and practical guidance. This article is a summary of the Practice Note we created for Sdu. For more information and to explore all our other Practice Notes and CSRD Tools, visit: https://www.sdu.nl/shop/jes-knowledge.html.

What is the EU Taxonomy?

The EU Taxonomy is a classification system for sustainable economic activities that is applied within the new European Corporate Sustainability Reporting Directive (CSRD). This system was developed to achieve the European climate goals: according to the Paris Agreement, the EU must be climate-neutral by 2050.

The classification system has three main objectives:

1. Preventing Greenwashing: By providing clear, standardized definitions of what is environmentally sustainable, it prevents activities from being falsely labeled as “green.”
2. Redirecting Capital Flows: By clarifying which investments are sustainable, capital flows can be directed toward activities that contribute to a sustainable economy.
3. Supporting the Green Transition: Companies are given concrete tools to make their activities more sustainable, focusing on protecting ecosystems, mitigating climate change, and transitioning to a circular economy.

Where the EU Taxonomy provides the classification framework for sustainable activities, the CSRD regulates sustainability reporting. Together, they form a powerful tool to help organizations and investors assess and guide their sustainability performance.

Step-by-Step Guide: Applying the EU Taxonomy in Your Organization

Step 1. Map Your Sustainable Activities

The first step is to identify which of your business activities might fall under the EU Taxonomy. While this seems straightforward, it requires a systematic approach:

• Check the EU Taxonomy Compass: This is an online tool from the EU that allows you to search for relevant taxonomy criteria by sector or activity. Note: the list of activities is dynamic and is regularly updated and expanded.
• Use NACE Codes as a Starting Point: A practical approach is to begin with your company’s NACE codes. These are the standard European codes for business activities. Be aware, however, that the taxonomy descriptions do not always directly align with NACE codes.
• Pay Attention to Different Types of Activities: The taxonomy distinguishes between:
  • Primary activities that directly contribute to sustainability.
  • Transitional activities that support the transition to a sustainable economy.
  • Enabling activities that help other companies become more sustainable.
• Look Beyond Core Activities: Supporting activities can also qualify. Think, for example, of energy management or sustainable real estate management.

Practical Example: A Construction Company Consider a construction company that builds new structures and renovates existing ones. According to section 7.2 of the technical criteria, building renovation falls under the EU Taxonomy. This is a concrete example of an eligible activity. However, there are many more possibilities: from installing solar energy systems and battery storage to implementing smart energy management systems.

Step 2. Assess Your Contribution to Environmental Objectives

After identifying your activities, the next step is to determine your environmental impact. An activity must make a significant positive contribution to at least one of the six environmental objectives of the EU:

The six environmental objectives are:

1. Climate Mitigation: Reducing greenhouse gas emissions, for example, through energy efficiency, renewable energy, and electric transportation.
2. Climate Adaptation: Reducing vulnerability to climate change, such as through improved water management, heat-resistant buildings, and climate-resilient infrastructure.
3. Water and Marine Resources: Protecting water bodies and marine ecosystems through water purification, sustainable water management, and water quality protection.
4. Circular Economy: Efficient use of materials and resources, including recycling, waste prevention, and material reuse.
5. Pollution Prevention: Reducing harmful emissions to air, water, and soil. Activities must comply with Best Available Techniques (BAT).
6. Biodiversity and Ecosystems: Protecting and restoring natural systems through nature conservation, sustainable agriculture, and ecosystem restoration.

Note: For CSRD reporting, climate mitigation and adaptation are combined into one theme, resulting in a total of five environmental themes.

Practical Example: A Holiday Park A holiday park seeking to be classified as sustainable under the taxonomy must, among other things:

• Demonstrate contributions to biodiversity conservation or restoration.
• Have a concrete action plan for nature conservation.
• Quantify its impact with measurable results.

To determine whether your activity significantly contributes, use:

• Sector-specific criteria from the EU Taxonomy Compass.
• Scientifically substantiated thresholds.
• Measurable indicators for impact.

Tip: Start with the environmental objective where you can make the greatest impact. Not every activity needs to contribute to all objectives – one significant contribution is sufficient, provided you do not cause significant harm to other objectives.

Step 3. Apply the Best Available Techniques

To be classified as sustainable, you must use the Best Available Techniques (BAT). This means deploying the most effective techniques available to minimize environmental impact. Consider three aspects:

• How the technique is designed, maintained, and eventually dismantled.
• The effectiveness for environmental protection and achieving results.
• The practical and economic feasibility on a large scale.

Practical Example: A Holiday Park Goes Sustainable

• Gray water recycling for reusing shower water.
• Heat pumps with good insulation for energy efficiency.
• Electric golf carts and charging stations.
• Native planting and green roofs.
• A natural swimming pond instead of a chemical pool.

Step 4. Avoid Harm to Other Environmental Goals

The ‘Do No Significant Harm’ (DNSH) principle acknowledges that business activities always have some environmental impact but sets clear limits. An activity contributing to one environmental goal must not cause significant harm to other objectives. In practice, this means conducting an Environmental Impact Assessment (EIA) to map your impact and take measures to mitigate negative effects. This is especially important for activities in sensitive areas.

Practical Example: DNSH Requirements

• Buildings with a minimum energy label of C.
• Nearly climate-neutral new buildings (post-2020).
• Separate waste collection.
• A plan to reduce food waste.

Step 5. Comply with OECD and UN Guidelines

Sustainability is not limited to environmental aspects. The EU Taxonomy also requires compliance with international social standards. This specifically means aligning your business operations with the OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights, and fundamental labor rights as outlined in the ILO principles.

Examples of Implementation:

• Develop policies for labor and governance.
• Set up a management system for working conditions.
• Monitor KPIs such as safety, diversity, and equal pay.
• Conduct regular audits, including of suppliers.

Getting Started with the EU Taxonomy

Implementing the EU Taxonomy in your organization may seem complex, but with the right approach, it is manageable. We recommend the following:

• Start preparing early (better today than tomorrow).
• Ensure proper documentation of all steps.
• Involve all stakeholders in the process.
• Use available tools and guidelines.
• Seek external expertise when needed.

Want to learn more about the EU Taxonomy and what it means for your organization? Contact us. Want to know more about Empact? Read our story!