EU Taxonomy Regulation 2020/852

Purpose of the regulation

The European regulation 2020/852 aims to establish "the criteria for determining whether an economic activity qualifies as environmentally sustainable for the purposes of establishing the degree to which an investment is environmentally sustainable" (Article 1)

The taxonomy is designed to support a whole set of regulations and codes of conduct for a number of European actors:

  • states for the definition of their legislation

  • companies for their investment strategy and the transparency of their activities

  • investors and designers of investment products  (collective investment schemes, insurance companies, banks) to guide asset selection

The text of the regulation defines the general framework and lists the sustainability criteria. A summary is presented below.

It should be noted, however, that this text is only the tip of the iceberg. The TEG (Technical Expert Group) has also produced an enormous amount of work analysing the economic sectors that are assessed according to their potential contribution to the first two criteria (climate change mitigation and climate change adaptation). These are the "technical screening criteria" that are used to assess the sustainability of an activity (see below).

The taxonomy is not set in stone, the technical screening criteria are not yet all defined and are logically intended to become more 'hardened' as the market aligns. The further development of the taxonomy has been entrusted to the "Sustainable Finance Platform", a group of fifty experts, seven representatives of public bodies and ten observers.

What is an environmentally sustainable economic activity? (article 3)

An environmentally sustainable economic activity:

  1. Substantially contributes to at least one of the environmental objectives defined in Article 9

  2. Does not significantly harm any of the environmental objectives

  3. Meets minimum safeguards

  4. Complies with technical screening criteria established by the European Commission

The environmental objectives (article 9)

An environmentally sustainable economic activity contributes substantially to at least one of the environmental objectives. What are they?

  1. Climate change mitigation

  2. Climate change adaptation

  3. Sustainable use and protection of water and marine resources

  4. Transition to a circular economy

  5. Pollution prevention and control

  6. Protection and restoration of biodiversity and ecosystems

In addition, there are "enabling" activities, which allow other activities to contribute to an environmental objective, provided they meet certain conditions.

The table below gives more detail on the activities that fit into each environmental objective.

Environmental objectives
Climate change mitigation (article 10)
  1. Production, transmission, storage, distribution and use of renewable energy

  2. Improved energy efficiency

  3. Clean mobility

  4. Use of renewable materials

  5. Carbon capture and utilisation (CCU) and carbon capture and storage (CCS) technologies

  6. Strengthening of land carbon sinks

  7. Infrastructure for decarbonising energy systems

  8. Clean fuel production

Transitional activity : activity for which there is no low-carbon alternative but favoring the transition to a climate neutral economy.

Climate change mitigation adaptation (article 11)

These activities include or provide solutions that prevent or reduce negative impacts of the climate and its expected evolution on a population, on nature or property and that do not increase the risk of negative impacts on another population, nature or property.

Sustainable use and protection of water and marine resources (article 12)
  1. Protection against discharges of contaminants via urban or industrial water

  2. Protection of water intended for human consumption from contaminants

  3. Improving the efficiency of water management, in terms of quality or quantity

  4. Sustainable use of marine ecosystem services and protection of marine ecosystems

Transition to a circular economy (article 13)
  1. Reduced consumption of primary raw materials and energy and increased use of secondary raw materials

  2. Increased durability, reparability, upgradability and reusability of products

  3. Increased recyclability of products

  4. Reduction in the content of hazardous substances or substances of concern

  5. Prolongation of the use of the products

  6. Increased use of secondary raw materials

  7. Reduction in waste generation

  8. Reuse and recycling of waste

  9. Waste management infrastructure for recycling

  10. Reduction of waste incineration and landfill

  11. Avoidance and reduction of litter

Pollution prevention and control (Article 14)
  1. Prevent or reduce emissions of pollutants other than greenhouse gases

  2. Improvement of water, air or soil quality in areas of economic activity

  3. Preventing negative impacts of chemicals on human health

  4. Cleaning up litter and other forms of pollution

Protection and restoration of biodiversity and ecosystems (article 15)
  1. Conservation and protection of biodiversity and ecosystems

  2. Sustainable land use

  3. Sustainable agricultural practices

  4. Sustainable forest management

Activity that enables other activities to make a substantial contribution to an environmental objective (article 16) and:
  • Has a significant positive environmental impact on the life cycle

  • Does not lead to a lock-in of assets that compromise long-term environmental goals

Do no significant harm to any environmental objective (article 17)

To be "sustainable", it is not enough to meet one or more environmental objectives, it is also necessary not to undermine the other objectives! For each environmental objective, the text also defines "disqualifying" criteria.

Do no significant harm to environmental objectives
Climate change mitigation

Does not lead to significant greenhouse gas emissions

Climate change adaptation

Does not lead to increased negative impacts of climate change on people, nature or property

Sustainable use and protection of water and marine resources

Is not detrimental to the good ecological status of freshwater bodies or marine waters

Circular economy

Does not present significant inefficiencies in terms of resource use and product sustainability.

Does not lead to a significant increase in waste generation or disposal, with the exception of the disposal of hazardous waste.

Disposal of waste has no long-term adverse effects on the environment.

Pollution prevention and control

Does not lead to a noticeable increase in pollutant emissions into the air, water or soil.

Protection and restoration of ecosystems

Is not detrimental to the resilience of ecosystems

Is not detrimental to the conservation of species habitats

Minimum safeguards (Article 18)

The taxonomy focuses on environmental aspects, however, in line with ESG (Environment, Social, Governance) principles, compliance with basic social criteria is required.

Technical screening criteria

As already mentioned, the most important part of the regulation is the annex, a large Excel workbook (Download, 6 Mb) which lists, by economic sector (identified by their NACE code) the sustainability criteria for two objectives (the other objectives will be covered later): climate change mitigation and climate change adaptation.

The text of the Regulation specifies the principles that guide the development of these criteria (article 19).

The technical screening criteria:
  • Identify the most relevant contributions, taking into account the principle of technological neutrality and short- and long-term impacts
  • Specify the requirements to be met to avoid significant harm to environmental objectives
  • Are quantitative and include thresholds where possible or, otherwise, qualitative
  • Are built upon existing EU legal instruments and standards
  • Use sustainability indicators
  • Are based on scientific evidence and the precautionary principle
  • Take into account the life cycle
  • Take into account the nature and scale of the economic activity (transitional or enabling activity)
  • Take into account the risk to markets that some assets become stranded and the risk of creating inconsistent incentives for sustainable investment
  • Cover all relevant economic activities within a given sector while avoiding distortions of competition
  • Are easy to use and verify

Examples of sustainability criteria

The tables below show, for two examples of activities (cement production and renovation of buildings), the evaluation criteria relating to the mitigation of climate change.

NACE Macro-SectorC - Manufacturing
Level 2C23
Level 3C23.5
Level 4C23.5.1
ActivityManufacture of cement
DescriptionManufacture of cement
Principle The manufacturing of cement is associated with significant CO2 emissions. Minimising process emissions through energy efficiency improvements and switch to alternative fuels, promoting the reduction of the clinker to cement ration and the use of alternative clinkers and binders can contribute to the mitigation objective.
Mitigation measures are eligible provided they are incorporated into a single investment plan within a determined time frame (5 or 10 years) that outlines how each of the measures in combination with others will in combination enable the activity to meet the threshold defined below actions.
Metric & Threshold Thresholds for cement Clinker (A) are applicable to plants that produce clinker only, and do not produce finished cement. All other plants need to meet the thresholds for cement or alternative binder.
  1. Cement clinker:
    Specific emissions (calculated according to the methodology used for EU-ETS benchmarks) associated to the clinker production processes are lower than the value of the related EU-ETS benchmark.
    As of February 2020, the EU-ETS benchmark value for cement clinker manufacturing is: 0.766 tCO2e/t of clinker.
  2. Cement:
    Specific emissions associated to the clinker and cement production processes are lower than: 0.498 tCO2e/t of cement or alternative binder

NACE Macro-SectorF - Construction
Level 2F41
Level 3F41.1
Level 4
ActivityBuilding renovation

Building renovation: this relates to activities under NACE codes F41.2 - Construction of residential and non-residential buildings and F43 - Specialised construction activities.

Principle The renovation of existing buildings to increase their energy efficiency makes a substantial contribution to climate change mitigation by reducing energy consumption and GHG emissions for the remaining operational phase of the buildings, and by avoiding emissions that would be associated with the construction of new buildings.
Condition for non-eligibility: to avoid lock-in and undermining the climate mitigation objective, the renovation of buildings occupied for the purpose of extraction, storage, transportation or manufacture of fossil fuels is not eligible.
Use of alternative schemes as proxies: outside EU Member States, established schemes such as “green building” certifications or building regulations may be used as alternative proof of eligibility, provided that this is verified by the Sustainable Finance Platform. The organisation responsible for the scheme will be able to apply for official recognition of its scheme by presenting evidence that a specific level of certification/regulation can be considered equivalent (or superior) to the taxonomy mitigation and DNSH threshold. The Sustainable Finance Platform will assess the evidence and approve or reject the application.
Metric & Threshold The thresholds used to assess the renovation rely on either the respective metrics set in the applicable building regulation for ‘major renovation’ transposing the EPBD, or, in the case of relative improvement, on Primary Energy Demand (PED) defined as follows: the annual primary energy demand associated with regulated energy use during the operational phase of the building life-cycle (i.e. ‘module B6’ according to EN15978), calculated ex-ante according to the national methodologies for asset design assessment, or as defined in the set of standards ISO 52000, expressed as kWh/m2 per year.
A renovation is eligible when it meets either one of the following thresholds:
  1. Major renovation: the renovation is compliant with the requirements set in the applicable building regulations for ‘major renovation’ transposing the Energy Performance of Buildings Directive (EPBD).
  2. Relative improvement: the renovation achieves savings in net Primary Energy Demand of at least 30% in comparison to the baseline performance of the building before the renovation. The baseline performance and predicted improvement shall be based on a specialised building survey and validated by an accredited energy auditor. The methodology used for the measurement of floor area must be declared by referring to the categories established by the International Property Measurement Standard.

To consult all the information made available by the European Commission concerning the taxonomy, see the EU taxonomy for sustainable activities.

  1. Do No Significant Harm
  2. Energy Performance of Buildings Directive (EU)