EU Taxonomy
Definition
The EU Taxonomy is a classification system establishing a list of environmentally sustainable economic activities based on science-based technical screening criteria. It provides a common language for investors, companies, and policymakers to determine which activities can be considered genuinely sustainable. Activities must substantially contribute to at least one of six environmental objectives without significantly harming the others.
Why It Matters
The EU Taxonomy is a cornerstone of the EU's sustainable finance framework and directly impacts investment flows and corporate strategy. Companies subject to CSRD must report the proportion of their activities that are Taxonomy-aligned.
Related Terms
CSRD (Corporate Sustainability Reporting Directive)
The Corporate Sustainability Reporting Directive (CSRD) is EU legislation that significantly expands mandatory sustainability reporting requirements for companies operating in Europe. It introduces the European Sustainability Reporting Standards (ESRS) and requires double materiality assessments, third-party assurance, and digital tagging of reports. The CSRD applies to approximately 50,000 companies, including non-EU companies with significant EU operations.
Green Bond
A green bond is a fixed-income financial instrument specifically earmarked to raise capital for projects with environmental benefits, such as renewable energy, clean transport, or sustainable water management. Green bonds follow established standards like the ICMA Green Bond Principles and increasingly the EU Green Bond Standard. They provide investors with a way to finance the transition to a low-carbon economy.
ESG Integration
ESG integration is the systematic inclusion of environmental, social, and governance factors into investment analysis and decision-making processes. Unlike negative screening or exclusion, ESG integration uses ESG data alongside traditional financial analysis to build a more complete picture of risk and opportunity. It is the most widely practised responsible investment approach globally.
Double Materiality
Double materiality is the principle that companies should report on sustainability matters from two perspectives: how ESG issues affect the company's financial performance (financial materiality) and how the company's activities impact people and the environment (impact materiality). This concept is central to the EU's CSRD and European Sustainability Reporting Standards. It represents a broader view than the single financial materiality approach used by ISSB.