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Become a partnerThe EU taxonomy: The classification system behind CSRD & SFDR
EU taxonomy, CSRD, SFDR – more and more regulations and rules are being imposed on companies. How they are connected, the role of the EU taxonomy and what affected companies need to do: VERSO gives you an overview.
What is the EU taxonomy & why does this classification system exist?
With the Green Deal, the European Union has set itself the goal of achieving climate neutrality by 2050. To achieve these climate targets, companies must also operate sustainably. You are probably familiar with advertisements or well-known cases of greenwashing where something has been falsely labeled as “sustainable”, “green” or “environmentally friendly”. Until now, there has been no clear definition of these terms.
The EU taxonomy solves this problem: it defines when a business activity is green, sustainable or environmentally friendly. This classification is then applied within the framework of the CSRD and SFDR.
The EU taxonomy:
- classifies economic activities in aspects of sustainability
- ensures a level playing field and legal certainty
- is applied within the framework of the CSRD and SFDR
- Obligation to disclose taxonomy-relevant information
What are the objectives of the EU taxonomy?
The EU taxonomy is intended to make the climate targets of the Green Deal achievable and measurable. The overarching objectives are therefore to realign capital flows with a focus on sustainable investments, to establish sustainability as a component of risk management and to promote long-term investments and encourage long-term business practices.
Establishing definitions
The EU taxonomy provides companies and investors with definitions of which economic activities can be considered environmentally sustainable.
Empowerment of investors
Greenwashing is limited in that products that do not meet the requirements can no longer be labeled as “green”. This empowers investors (and retail investors) to invest their capital in environmentally sustainable activities.
Avoidance of market fragmentation
When environmental sustainability is clearly defined, there is only one point of reference for investors, companies and member states. As a result, the market for sustainable business activities is less fragmented.
Mandatory disclosure of turnover
All sales that are relevant for the EU taxonomy must be disclosed. This also applies to investments by financial market players and large companies.
Which companies are affected by the EU taxonomy?
Two groups are currently affected by the classification system: large capital market-oriented companies with more than 500 employees and financial market participants that offer financial products in the EU.
In simple terms: those companies that have been obliged to publish non-financial information since 2017 under the CSR-RUG (CSR Directive Implementation Act) or fall under the Sustainable Finance Disclosure Regulation (SFDR), such as banks, credit institutions, pension funds and insurance companies.
However, the CSRD (Corporate Sustainability Reporting Directive) has extended the reporting obligation even further. In future, the EU taxonomy will also be relevant for the following companies:
- All large companies that fulfill at least two of the following criteria: More than 250 employees, a balance sheet total of more than €25 million or net revenue of more than €50 million. They must submit a report for the 2025 financial year from 2026.
- All capital market-oriented small and medium-sized enterprises with the exception of micro-enterprises. From 2027, they are obliged to report for the 2026 financial year.
What should I do if I am affected?
If you are affected, you must disclose how sustainable your economic activities are. Three key figures are relevant for you: You report what proportion of your total turnover, your capital expenditure (CapEx) and your operating expenditure (OpEx) is accounted for by taxonomy-eligible or taxonomy-compliant economic activities.
When are your business activities considered sustainable or green?
They make a substantial contribution to at least one of the six environmental goals
They do not affect any of the other environmental objectives
They are exercised in compliance with the minimum protection (OECD Guidelines)
The European Union’s climate and environmental protection goals are climate protection, adaptation to climate change, sustainable use of water or marine resources, transition to a circular economy, prevention or control of pollution and protection and restoration of biodiversity and ecosystems.
The information on your sustainable management is then checked and classified according to the following four criteria:
- The economic activity contributes to at least one of the environmental objectives
- Economic activity does not significantly harm any of the environmental objectives
- The economic activity fulfills a minimum of security standards, for example the UN Guiding Principles on Business and Human rights, in order to avoid a negative social impact
- The economic activity fulfills the technical selection criteria developed by the EU Technical Expert Group
Are you obliged to disclose your business activities with regard to sustainability? Then you can no longer ignore the sustainability report. But if you are still worried about this, then let us advise you. Let us help you get started in the world of ESG reporting!
You can find out more about how this is all connected in our blog post.
Planned extensions to the EU taxonomy
The European Commission is advised on sustainability issues by the Platform for Sustainable Finance. It is now proposing an expansion of the classification system to include new categories of economic activities and to color-code them. In the future, it could look like this:
- Red area: Economic activities that significantly impair at least one environmental objective.
- Yellow area: The so-called intermediate activities have a medium environmental performance for which an improved carbon footprint could be the goal.
- Neutral area: Activities that do not have a significant impact on the environment and are not relevant to the achievement of climate targets.
- Green area: These activities make a significant contribution to achieving climate and environmental goals and are already largely included in the EU taxonomy.
Are you affected by the CSRD? VERSO can help you!
The EU taxonomy already affects many companies in Germany. With the introduction of the CSRD, in the next few years those companies for whom sustainability reports have not yet been an issue will also be required to report. At the beginning there are many question marks, disorganized mountains of data and seemingly complicated standards.
We can understand the initial overload – after all, we have experience with this. And a solution for you: the VERSO ESG Hub for holistic sustainability management, with which you can comply with regulations such as the CSRD and SFDR. We accompany you on your sustainability journey.
