Background: The EU Taxonomy Regulation
The EU Taxonomy Regulation (Regulation (EU) 2020/852) entered into force in July 2020 and established a science-based classification system for sustainable economic activities. The Regulation defined six overarching environmental objectives and required the European Commission to develop technical screening criteria (TSC) for each.
The first two objectives — Climate Change Mitigation and Climate Change Adaptation — were addressed through the first Delegated Act, which became applicable from January 1, 2022, for large public-interest entities and January 1, 2023, for other eligible companies.
The Four New Environmental Objectives
In June 2022, the European Commission published the second major Delegated Act, extending the Taxonomy to the remaining four environmental objectives:
- Sustainable use and protection of water and marine resources — covering activities that manage water sustainably, protect aquatic ecosystems, and reduce water stress
- Transition to a circular economy — including waste prevention, reuse, repair, recycling, and design for circularity
- Pollution prevention and control — addressing reduction of emissions into air, water, and soil, as well as management of hazardous substances
- Protection and restoration of biodiversity and ecosystems — encompassing the conservation of habitats, species, and ecosystem services
DNSH Principle and the Do No Significant Harm Framework
A central feature of the EU Taxonomy is the Do No Significant Harm (DNSH) principle: for an economic activity to be considered taxonomy-aligned for one objective, it must not significantly harm any of the other five. This creates a rigorous multi-dimensional screening requirement that applies equally to the four new objectives.
Implications for SFDR and Sustainable Finance
The expansion of the Taxonomy carries direct consequences for the Sustainable Finance Disclosure Regulation (SFDR). Financial market participants marketing Article 8 or Article 9 funds must disclose the proportion of taxonomy-aligned investments within their portfolios. As the Taxonomy coverage expands, so does the scope of required disclosures and the investable universe of compliant activities.
The EU Taxonomy is not a label — it is a regulatory baseline that defines what qualifies as an environmentally sustainable economic activity under European law.
Relevance for Nature-Based Investments
For investment strategies focused on forestry, agroforestry, and land use — such as Paulownia short-rotation cultivation — the expansion of Taxonomy objectives to encompass biodiversity and circular economy is particularly significant. Activities that sequester carbon while simultaneously enhancing soil health, reducing land degradation, and promoting polyculture may qualify under multiple Taxonomy objectives simultaneously, enhancing both their regulatory standing and market positioning.