What is the difference between the EU Taxonomy and the CSRD?

What is the difference between the EU Taxonomy and the CSRD?

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The European Union has established a comprehensive framework for sustainable finance, with two key components working in tandem: the EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD). The EU Taxonomy functions as a classification system, defining what economic activities can be considered truly environmentally sustainable. This classification system serves as the foundation for regulations like the CSRD, which mandates companies to report on their sustainability performance against the established Taxonomy criteria. This structure fosters transparency and accountability within sustainable finance, ensuring that both companies and investors have a clear understanding of environmental impact.

The EU Taxonomy and its role in Sustainable Economic Activities

The EU Taxonomy emphasizes the sustainability of economic activities. It requires assessments of how these activities align with climate goals, considering future climate scenarios. This approach is crucial in reducing the risk of greenwashing and promoting environmental objectives. It ensures that investments are directed towards genuinely sustainable activities, thereby enhancing the transparency of green finance.

The CSRD and its impact on Sustainability Reporting

On the other hand, the CSRD mandates corporate sustainability reporting. It's an expansion of the Non-Financial Reporting Directive (NFRD) and focuses on improving the quality and comparability of sustainability information disclosed by large public-interest entities. The CSRD requires financial market participants to disclose how their products align with sustainability criteria. This ESG disclosure enhances transparency and guides investments towards environmentally friendly initiatives.

Understanding Climate Risks and their Financial Impacts

Both the EU Taxonomy and the CSRD require companies to evaluate climate-related risks, but with different focuses. The CSRD mandates comprehensive climate risk and impact reporting, including financial effects of physical and transition risks. This reporting is critical in climate change adaptation and in assessing the financial impacts of environmental sustainability.

The Interplay between the EU Taxonomy and the CSRD

While the CSRD (Corporate Sustainability Reporting Directive) and the EU Taxonomy serve different purposes within the EU's sustainable finance framework, they are complementary. The CSRD focuses on ESG disclosure, while the EU Taxonomy classifies economic activities based on their environmental sustainability. Both aim to enhance transparency and guide green investments towards sustainability.

In conclusion, understanding the difference between the EU Taxonomy and the CSRD is crucial for any organisation aiming to align with the EU's climate goals and sustainable finance objectives. This understanding will help in the prevention of greenwashing and ensure the promotion of genuine environmental objectives.

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