Why the Finance Sector Wants to Simplify the EU Taxonomy

The EU Taxonomy was designed to be a gold standard in sustainable finance, providing investors and companies with a clear, science-based classification system for environmentally friendly activities.

Its implementation, however, hasn’t been quite as smooth as was initially hoped.

Two years after firms began reporting under the framework, a new usability report from the EU Platform on Sustainable Finance calls for sweeping changes to reduce complexity and improve data quality.

The report, the result of two years of research and stakeholder engagement, highlights the persistent difficulties businesses face in applying the Taxonomy.

“Reporting is a means to an end: mobilising capital flows to sustainable investments and financing the transition,” says Linda Zeilina-Cross, CEO of the International Sustainable Finance Centre and a Platform member.

But while the intent remains clear, the execution has been far from seamless.

Linda Zeilina-Cross, CEO of the International Sustainable Finance Center and Member of the EU Platform on Sustainable Finance | Credit: Linda Zeilina-Cross

The burden of compliance

One of the primary issues raised in the report is the excessive burden placed on companies to demonstrate compliance.

The ‘Do No Significant Harm’ (DNSH) principle, a core aspect of the Taxonomy, has been flagged as particularly cumbersome.

Assessing whether an activity meets DNSH criteria is highly complex, with requirements often difficult to verify retrospectively.

As the report notes, only 3% of the criteria are quantitative and linked to a standard, making consistent data collection a challenge.

Financial institutions, too, have struggled with the Green Asset Ratio (GAR) and Green Investment Ratio (GIR), which aim to quantify the proportion of sustainable investments in a firm’s portfolio.

The Platform’s findings suggest these metrics are not functioning as intended, with significant inconsistencies in reporting.

“The GAR is the main Taxonomy-related disclosure KPI for credit institutions, but the way it is reported today means it is not comparable or functioning as designed,” the report states.

A roadmap for reform

To address these shortcomings, the Platform has put forward five key recommendations.

Among them is a proposal to refine the DNSH assessment by tailoring it to different users and geographies, making it easier for companies to demonstrate compliance.

Additionally, a materiality principle is suggested to limit excessive reporting requirements, particularly for non-financial firms.

Another major recommendation is to allow financial institutions to use estimates and proxies when calculating their Green Asset and Green Investment Ratios.

This change would simplify reporting while still maintaining the integrity of the framework.

“Allowing proxies and estimates across all assets will reduce the administrative burden while ensuring the Taxonomy remains a robust tool for measuring sustainability,” the report states.

Small and medium-sized enterprises (SMEs) are also set to benefit, with the Platform calling for simplified and voluntary reporting approaches to ease compliance.

SMEs have long voiced concerns about the disproportionate impact of sustainability reporting obligations, and the proposed reforms could offer much-needed relief.

The Platform’s report advocates for a simpler form of compliance

Five key recommendations from the report

The report’s five recommendations for the EU Taxonomy are as follows:

1. Refine the “Do No Significant Harm” (DNSH) assessment and reporting obligations by distinguishing between users (non-financial vs. financial entities), uses (turnover vs. capital expenditure), and geographies (EU vs. non-EU exposures).

2. Introduce a materiality principle applicable to all entities, materiality thresholds for all non-financial company KPIs, and a simplified DNSH assessment for the turnover KPI. Additionally, clarify the OpEx KPI calculation while limiting its mandatory scope to R&D.

3. Define clear guidelines for the use of estimates within the Taxonomy framework and establish safe harbours for financial sector reporting.

4. Allow proxies and estimates across all assets in the context of the Green Asset Ratio (GAR) and Green Investment Ratio (GIR), while introducing a simplified retail assessment and a reduced denominator for asset classes strictly measurable against the Taxonomy.

5. Develop simplified and voluntary approaches for SMEs, as well as for banks and investors, to integrate the Taxonomy into their disclosures.

The EU Taxonomy is regarded as a positive initiative for the sustainable finance sector, but it is thought that aligning with it could be far more streamlined

Will the European Commission act?

The European Commission, which tasked the Platform with this review, now faces a critical decision on whether to implement these recommendations.

While there is broad agreement on the need for simplification, there remains a balancing act between maintaining the Taxonomy’s credibility and ensuring it is practical for companies to use.

Ursula von der Leyen’s announcement in November 2024 of plans to consolidate EU sustainability reporting obligations into a single ‘Omnibus‘ regulation signals a willingness to address industry concerns.

Ursula von der Leyen, President of the European Commission

The question now is how far the Commission is prepared to go in reshaping the Taxonomy framework.

With the financial sector increasingly reliant on clear, comparable sustainable data, the stakes are high. If the EU can get the Taxonomy right, it has the potential to remain the global benchmark for sustainable finance.

But failure to act on these recommendations risks undermining confidence in a system that was meant to drive Europe’s green transition.

“The Taxonomy is working on the ground, despite the need for simplification and adjustments based on the learnings from its implementation,” Linda explains.

Helena Viñes Fiestas, Chair of the Platform, tends to agree.

Helena Viñes Fiestas (left), Chair of the Platform and Mairead McGuinness (right), European Commissioner for Financial Stability, Financial Services and the Capital Markets Union | Credit: Helena Viñes Fiestas

“The EU Taxonomy is a breakthrough tool for steering investments towards a climate-resilient, net-zero and sustainable economy, further cementing Europe’s position as a leader in sustainable finance,” she says.

“To unlock its full potential, ongoing refinements and simplifications are essential. Criticism regarding its operationality is valid and warrants careful attention.”

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