EU Taxonomy project finance explained

EU taxonomy project finance is the application of Regulation (EU) 2020/852 and the Article 8 Disclosures Delegated Act to specialised lending where the use of proceeds funds identified economic activities, often through an SPV borrower in a project finance structure.

What the Taxonomy Regulation decides

Regulation (EU) 2020/852 of 18 June 2020 establishes a Union classification framework for environmentally sustainable economic activities. Article 3 sets four cumulative conditions for an activity to qualify as environmentally sustainable: substantial contribution to one or more of the environmental objectives in Article 9; no significant harm to any of those objectives under Article 17; compliance with the minimum safeguards in Article 18; and conformity with technical screening criteria established in delegated acts.

Article 9 lists six environmental objectives: climate change mitigation; climate change adaptation; the sustainable use and protection of water and marine resources; the transition to a circular economy; pollution prevention and control; and the protection and restoration of biodiversity and ecosystems. Recital 23 of the Regulation frames those six objectives as the exhaustive environmental list for the Taxonomy. Technical screening criteria specify activity-level conditions for substantial contribution and for the do no significant harm test.

Article 18 requires minimum safeguards aligned with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the ILO Declaration on Fundamental Principles and Rights at Work, the eight fundamental ILO conventions, and the International Bill of Human Rights. Taxonomy alignment is therefore not a single green label. It is a four-part legal test applied to defined economic activities.

EU taxonomy project finance and known use of proceeds

Project finance is typically use-of-proceeds lending: funds are drawn for construction or acquisition of a ring-fenced project, subject to conditions precedent, a cash waterfall and a security package. The third Commission Notice on the Disclosures Delegated Act under Article 8 of the Taxonomy Regulation (OJ C, C/2024/6691, 8 November 2024) distinguishes exposures with known use of proceeds from exposures with unknown use of proceeds.

Where the purpose of financing is to fund specific identified activities, the Notice states that those exposures should be included in the numerators of the relevant KPIs of the financial undertaking to the extent they finance Taxonomy-aligned activities, without further weighting by the issuer or counterparty KPI. Where the use of proceeds is unknown, exposures are weighted by the turnover-based and CapEx-based KPIs of the counterparty or issuer under the methodology in the Disclosures Delegated Act.

That distinction matters for EU taxonomy project finance. A dedicated facility that finances a single Taxonomy-eligible activity can be assessed against the technical screening criteria of that activity. A general corporate revolver cannot. Credit officers still apply ordinary credit tests such as DSCR and covenant packages; Taxonomy alignment is an environmental sustainability classification and disclosure measure, not a substitute for repayment analysis.

SPV exposures and look-through

Question 14 of the same Commission Notice addresses special purpose vehicles and specialised lending or project financing for Taxonomy-alignment reporting. Disclosure obligations of financial undertakings under the Disclosures Delegated Act are intended to show the extent to which investments or financing fund Taxonomy-aligned activities. Financial undertakings should therefore look through investments and assets to the ultimate beneficiaries and their Taxonomy-aligned activities.

The Notice states that financial undertakings should include in their Taxonomy assessment exposures to SPVs that finance entities subject to Article 19a or 29a of the Accounting Directive, or that belong to a group where the parent of the SPV is subject to Article 29a on a consolidated basis. For lending and investments where the use of proceeds is unknown, KPIs of the ultimate beneficiary or, where unavailable, of the reporting parent are used. For financing where the use of proceeds is known, the Taxonomy alignment of the economic activities financed through the SPV is taken into account.

In classical project finance the borrower is often an SPV that holds the project assets and contracts. Known-use-of-proceeds treatment therefore focuses on the activity housed in the SPV rather than on a diversified corporate KPI. Legacy stock financed before Taxonomy criteria existed is expected, under the Notice, to show lower alignment than new flow financing of Taxonomy-aligned projects. That expectation matches the Regulation's objective of facilitating financing of new environmentally sustainable activities and projects, as restated in the Commission Notice.

Institutional boundary for banks

Article 8 of Regulation (EU) 2020/852 requires certain undertakings that publish non-financial information under Directive 2013/34/EU to disclose how and to what extent their activities are associated with environmentally sustainable economic activities. The Disclosures Delegated Act specifies KPIs for financial undertakings, including the Green Asset Ratio for credit institutions. The Commission Notice emphasises that those KPIs do not limit financing of lawful sectors or operators; they measure Taxonomy-aligned financing within a wider balance sheet.

Non-financial undertakings began reporting Taxonomy KPIs as of 1 January 2023 under the timeline described in the Notice. Financial undertakings use counterparties' disclosed KPIs when calculating their own metrics for unknown-use-of-proceeds exposures. Where relevant KPIs are unavailable, the Notice instructs that the exposure be treated as non-eligible or not aligned in the numerator, with contextual qualitative disclosure, while voluntary estimates may be shown separately from mandatory KPIs.

EU taxonomy project finance therefore intersects bank origination at documentation and reporting points: identification of the financed activity, collection of evidence for substantial contribution and do no significant harm, and treatment of SPV look-through under known-use-of-proceeds rules. It does not replace host-country permitting, Equator Principles environmental and social categorisation where those apply, or the contractual allocation of construction and offtake risk in the financing documents. Alignment evidence is typically assembled through technical advisers and borrower certifications timed to financial close and subsequent reporting cycles, not through the Taxonomy Regulation creating a separate security interest or repayment waterfall.