2. The EU Taxonomy Regulation (EU) 2020/852

The Taxonomy Regulation

European Commission (2020). Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088

entered into force in July 2020. The regulation aims to provide technical screening criteria allowing companies, investors, and financial market participants to establish whether economic activities contribute significantly to environmental objectives, also referred to as taxonomy-eligible or taxonomy-aligned. If the activity is taxonomy-aligned, it means it qualifies as environmentally sustainable. If the economic activity is taxonomy-eligible, it means that it is within the scope of the taxonomy and must be assessed against.

The EU taxonomy has a guiding purpose and does not entail any obligations on companies or prohibitions against certain types of investments. Rather, it is expected to provide benefits through increased transparency, classification, and communication regarding which economic activities can be considered environmentally sustainable. The taxonomy is intended to prevent greenwashing and establish the basis for standards and labelling schemes for green financial products and instruments. As such, it is a tool designed to make it easier for actors in the financial markets to assess whether investments align with long-term European climate and environmental goals. At the core of this taxonomy lies a classification system outlining criteria for economic activities that resonate with a net-zero climate target by 2050 and broader environmental objectives. The Taxonomy consists of six environmental objectives defined by Article 9 of the Taxonomy Regulation. The objectives are outlined in Figure 1 below.

The six environmental objectives:

Climate change mitigation
Climate change adaptation
Sustainable use and protection of water and marine resources
Transtision to a circular economy
Pollution prevention and control
Protection and restoration of biodiversity and ecosystems

Figure 1 The six environmental objectives defined by the EU Taxonomy Regulation.

Companies covered by the EU taxonomy are financial market participants and large companies. In total, there are 13 different sectors covered by the Taxonomy.

See full list of sectors at the EU Commission website: https://ec.europa.eu/sustainable-finance-taxonomy/sectors

Since 2021, these companies must disclose the proportion of their economic activities that are taxonomy eligible. As of 2022, the companies must further analyse and report which economic activities that are taxonomy aligned. All companies that are obliged to report according to the EU Taxonomy today, are required to disclose the proportion (%) of their activities that are eligible and aligned according to three key performance indicators: turnover, capital expenditures (CapEx) and operating expenditures (OpEx). The sustainability reporting must also include qualitative information that explains the three key performance indicators, the assessments and interpretations made.

Ernst & Young. (2023).

From 2022, it became mandatory for EU countries (Norway one year later) to report on the share of economic activities that are taxonomy eligible. From 2023 it became mandatory for companies in Sweden and Finland

In Norway it will be mandatory to report on alignment and which environmental objective that is chosen from 2025. Some companies have voluntarily reported on this already.

to report on the share of economic activities that are both taxonomy-eligible and taxonomy-aligned. It must by then also be specified in sustainability reports (except for Norway being a non-EU member), which environmental objective the company has chosen for the assessment “contribute significantly to”. Hence, there are no requirements from the EU which environmental objective to select, but mandatory to choose at least one out of the six environmental objectives. The Taxonomy includes six environmental objectives, which are divided between two different Delegated Acts. The Climate Delegated Act

Commission Delegated Regulation (EU) 2021/2139 of 4 June 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council

was adopted in 2021 and later in 2023 the Environmental Delegated Act

Commission Delegated Regulation (EU) 2023/2486 of 27 June 2023 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council

was adopted. The two first environmental objectives fall under to the Climate Delegated Act. The Environmental Delegated Act contains the remaining four environmental objectives (3-6).

To assess whether the economic activities are eligible and aligned according to the Taxonomy, there are numerous Technical Screening Criteria (TSC) described for each environmental objective. The TSC are described in the Climate and Environmental Delegated Acts.

Ernst & Young. (2023).

TSC are not developed for all sectors, which means that there are some sectors that will automatically be excluded from the Taxonomy.

In the 2023 financial period, the reporting was extended to include an eligibility assessment of the four environmental objectives under the Environmental Delegated Act. There were in the same period also updates to the Climate Delegated Act. In the coming years, the scope will gradually broaden further, including smaller size companies and non-listed companies as well.

EU Commission. (2023a).

See the timeline below in Figure 2. However, for Norway, being a non-EU member, the EU taxonomy Regulation entered into force under Norwegian law on 1 January 2023. Listed companies are therefore obliged to publicly report for the first time on the Taxonomy in 2024, for fiscal year 2023.

Regjeringen. (2024).

For non-listed companies in Norway, the first mandatory reporting will be for fiscal year 2024, with publication in 2025.

Figure 2 Timeline of the EU Taxonomy regulation and accompanying directives entering into force. *Both CSRD and ESRS will be described in section 2.1 below.

In this report, focus will be on environmental objective one and six, which are defined in the Taxonomy Regulation in Article 10 and 15. Articles 17 and 18 must also be included in the assessment for an economic activity to be classified as sustainable. The four different articles are described in detail below.

Article 10: Substantial contribution to climate change mitigation
The first environmental objective presented under the EU Taxonomy Regulation is Article 10, Substantial contribution to climate change mitigation. The overarching definition of the Article is that the economic activity substantially should contribute to climate change mitigation, stabilisation of greenhouse gas concentrations in the atmosphere through avoidance or reduction of greenhouse gas emissions or an increase of greenhouse gas removals. The Article further lists (a-i) several processes and product innovations which broadly define how these mitigation activities can be achieved.

Article 10, EU (2020): Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088

Article 15: Substantial contribution to the protection and restoration of biodiversity & ecosystems
The sixth environmental objective presented under the EU Taxonomy Regulation is Article 15, Substantial contribution to the protection and restoration of biodiversity and ecosystems. The main goal of the objective is that the economic activity should contribute to protecting, conserving or restoring biodiversity, to achieve good condition of ecosystems or protect ecosystems that already are in good condition. These objectives are further described through a set of actions (a-e) that are listed in the Article.

Article 17, EU (2020): Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088

Article 17: Do No Significant Harm Criteria (DNSH)
The purpose of this Article is to clarify when an economic activity significantly harms an environmental objective and likewise applied when assessing whether an economic activity is environmentally sustainable. For an activity to be classified as sustainable, it is not sufficient to contribute to one of the six objectives. The activity must also not violate any of the other objectives. The DNSH refers to specific thresholds or requirements that should be met when an economic activity is carried out. The technical screening criteria help guide this assessment. The DNSH principle should be applied to all activities that are taxonomy eligible.

European Securities and Markets Authority. (2023).

Article 18: Minimum Safeguards
Article 18 should be used as a due diligence procedure for the company to ensure alignment according to fundamental conventions and principles regarding human and labour rights. To comply with Article 18, company activities should follow the standards from the Organisation for Economic Cooperation and Development Guidelines for Multinational Enterprises (OECD MNEs) as well as UN Guiding Principles on Business and Human Rights (UNGP).

Article 18, EU (2020): Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088

2.1 SFDR & CSRD

The Taxonomy is part of a broader sustainable finance framework under the EU Green Deal, which in terms of reporting consists of the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD). There is cross-referencing between the Taxonomy for sustainable investments and these reporting directives, with a broad overlap between those subject to reporting requirements and those required to disclose their investment information under the Taxonomy.

European Commission. (2023d).

Regulation (EU) 2019/2088, known as the Sustainable Finance Disclosure Regulation (SFDR), is a key legislation in the European Union aimed at increasing transparency in the financial services sector regarding sustainability. The SFDR requires financial market participants, such as asset managers, financial advisors, and insurance companies, to disclose how they integrate environmental, social, and governance (ESG) factors into their investment decisions and advisory processes. This includes their policies for integrating sustainability risks into their investment activities and the impact of their activities on sustainability factors. These disclosures must be presented at both the entity and product levels and communicated in a clear, precise, and balanced manner.

European Commission (2019a)

The Corporate Sustainability Reporting Directive (CSRD), Directive 2022/2464, entered into force in January 2023. CSRD replaces and applies to all companies that were compliant to report under the Non-Financial Reporting Directive (NFRD), which makes it mandatory for large (>500 employees) and listed companies to disclose sustainability information. As of January 1, 2024, large and listed companies already subject to the NFRD will have to report according to CSRD. Companies subject to this are therefore preparing to have the reporting ready to be published in 2025 along with the annual report. During 2025 and 2026, small and non-listed companies will gradually be subject to reporting as well. CSRD provides standardised reporting rules on how companies must report on sustainability, aiming to increase transparency and ensure better accountability through more informed decisions.

European Commission. (2023a).

CSRD can be seen as a complement to the EU taxonomy reporting, where it is also referenced that the taxonomy must be reported under CSRD. The Taxonomy is micro level reporting on economic activities, whereas the CSRD focuses on macro level for the whole company. To a large extent, most companies covered by the Taxonomy are also required to provide a non-financial statement according to the CSRD.

To ensure more consistent and comparable sustainability reporting, according to CSRD, European Sustainability Reporting Standards (ESRS) were adopted in July 2023. ESRS aims to provide specific guidelines and standards for ESG reporting under CSRD. All companies that are mandated to report according to CSRD must follow the standards according to ESRS to be in line with reporting rules and standards. Therefore, ESRS is legally binding and must be reported in annual reports and financials. ESRS is built upon the ESG principles, hence there are environmental, social, and governance standards.

The themes addressed for reporting under the CSRD and the developed ESRS reporting standards are largely aligned with the six environmental objectives and the minimum safeguards part of the Taxonomy.

European Commission (2023b).

2.2 Screening for taxonomy alignment

A company must go through a four-step process to assess whether the business activity is taxonomy eligible and subsequently aligned or not. The four steps are:

Is the business activity associated with a taxonomy activity?
The business activity is classified as eligible if it falls under a taxonomy activity. The Taxonomy activities are linked to the NACE code structure, which is an industry standard classification scheme that classifies economic activities in the EU. All activities that are taxonomy eligible are further defined in the accompanying technical screening criteria for that specific environmental objective.
Does the activity make substantial contribution to one of the six environmental objectives?
If the business activity is eligible, it is important to categorise which environmental objective (1-6) the activity falls under.
Does the activity do no significant harm (DNSH) to any of the other environmental objectives?
For an economic activity to be classified as sustainable, the economic activity must contribute to at least one of the environmental objectives, and not harm any of the remaining five objectives.
Does the activity meet the Minimum Safeguards?
An economic activity complies with the minimum safeguards if certain human and labour right standards are followed, and therefore not causing any negative social impact.

Figure 3 To fulfil the EU taxonomy reporting requirements, these three steps must be undertaken, using the TSC as guidance throughout the whole process.

2.3 Consequences of non-compliance

The EU taxonomy does not entail any sanctions for companies not complying with the reporting requirements. The Taxonomy Regulation does not entail direct sanctions for non-compliant financial institutions either. Instead, it calls on member states to establish measures and penalties of their own for non-compliance by financial institutions. The regulation states that any measures and penalties must be effective, proportionate, and dissuasive.

The authority responsible for monitoring compliance with disclosure obligations in Finland, Sweden, and Norway is the Financial Supervisory Authority in each respective country.

Finansinspektionen. (2024).

The Financial Supervisory Authority of Norway. (2023).

FIN-FSA, Financial Supervisory Authority. (2023).

Risks that companies who do not follow the EU taxonomy guideline could face might include:

Conmy, S. (n.d.)

Reputational risks
Limited access to investments
Financial penalties and fines
Legal and regulatory risks
Market access and trade barriers
Missed business opportunities
Long-term viability

In conclusion, while the EU taxonomy does not impose direct sanctions for non-compliance, the potential risks for companies that fail to adhere to its guidelines are significant. These risks extend beyond regulatory penalties and encompass broader challenges such as reputational damage, limited investment opportunities, and long-term viability. Therefore, companies in the Nordic countries and beyond should consider the implications of non-compliance carefully and ensure that they meet the necessary disclosure obligations to avoid these potential pitfalls.