EU Taxonomy for Sustainable Finance
Definition
The EU Taxonomy (Regulation (EU) 2020/852) is a classification system that defines which economic activities qualify as environmentally sustainable. It provides a common language for investors, companies, and policymakers to determine what counts as "green" — preventing greenwashing in financial markets.
Why it matters for DPP and product companies
The EU Taxonomy creates a direct financial incentive for companies to align with circular economy and sustainability regulations:
- Green financing: Companies whose activities are taxonomy-aligned can access green bonds, sustainability-linked loans, and ESG investment at better terms
- Investor reporting: Under CSRD, companies must disclose what percentage of their revenue, capex, and opex is taxonomy-aligned
- Fund labelling: Investment funds marketing themselves as "sustainable" under SFDR must report taxonomy alignment
The connection to DPP: Product-level sustainability data — carbon footprint, recycled content, durability, recyclability — is precisely the data needed to demonstrate taxonomy alignment. Companies with robust DPP data can substantiate their green finance claims. Companies without it cannot.
The six environmental objectives
An activity is taxonomy-aligned if it substantially contributes to at least one objective without significantly harming the others. This "without significantly harming the others" requirement is known as the Do No Significant Harm (DNSH) principle — a cross-cutting test that all taxonomy-aligned activities must pass across the remaining five environmental objectives.
- Climate change mitigation — reducing greenhouse gas emissions
- Climate change adaptation — reducing climate vulnerability
- Sustainable use of water and marine resources
- Transition to a circular economy — directly linked to ESPR/DPP
- Pollution prevention and control — linked to REACH/SVHC disclosure
- Protection of biodiversity and ecosystems — linked to EUDR
The funding cascade
The EU Taxonomy sits at the top of a funding cascade:
- EU Taxonomy defines what is "green"
- SFDR requires funds to disclose how green they are
- CSRD requires companies to report taxonomy alignment
- Green bonds (EU Green Bond Standard) must finance taxonomy-aligned activities
- Product-level data (DPP) provides the evidence base for all of the above
This cascade means that companies with verifiable product sustainability data — through DPPs — are better positioned to attract green investment. The data flows from product to company to investor to fund.
Related terms
- European Green Deal — the policy framework
- Circular Economy — Taxonomy Objective 4
- Digital Product Passport (DPP) — the product-level data layer