The EU Taxonomy is a classification system designed to help companies and investors evaluate economic activities on the basis of environmental, social and governance (ESG) criteria.
The Taxonomy aims to help channel investment into sustainable projects and steer financial markets in a more sustainable direction. The EU Taxonomy was published by the European Commission in June 2020 and includes six environmental objectives: Climate change mitigation, adaptation to climate change, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and reduction, and protection and restoration of biodiversity and ecosystems.
The taxonomy defines which economic activities are considered "sustainable" and which are not. Companies must meet certain criteria to be classified as sustainable. These include demonstrating carbon reductions, using renewable energy or supporting the circular economy. Investors can use the EU Taxonomy to ensure that they invest in sustainable projects and align their portfolio with ESG criteria.
The EU Taxonomy is part of a broader European Union plan to promote sustainable finance. However, it is controversial as some critics fear that it could restrict competition in the financial market and lead to a lack of investment in companies that are not classified as sustainable.