The EU Taxonomy Regulation, effective as of June 2020, introduced a transformative shift in how large corporations must categorize their economic activities with respect to sustainability. By 2021, as companies began grappling with the operational realities of compliance, supply-chain managers found themselves facing an increasingly complex landscape. The Regulation’s scope, though framed around environmental objectives like 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, extended deep into global supply chains. For firms dependent on intricate international supplier networks, particularly those with exposure to resource-intensive sectors, this meant a significant expansion in reporting obligations that could not be met with existing procurement or ESG frameworks alone. What became clear, perhaps more quickly than many had expected, was that the taxonomy was not simply a matter of reclassifying internal operations — it demanded a thorough examination and mapping of Tier 1 and Tier 2 suppliers against these environmental objectives, and this process was far from straightforward.
The initial challenge was definitional. The taxonomy’s technical screening criteria, while detailed, required suppliers to provide data and documentation that many had never before prepared, or even considered relevant to business partnerships. For Tier 1 suppliers, particularly those based in the EU or closely connected to EU markets, familiarity with the language of the taxonomy was more common, though certainly not universal. For Tier 2 suppliers — often smaller firms, and frequently operating outside of the EU — awareness and readiness were considerably more uneven. Supply-chain managers had to devise strategies not only to collect data but to educate suppliers on what was being asked and why it mattered. This introduced delays, miscommunications, and in some cases, resistance or confusion that slowed reporting cycles. Some supply-chain teams experimented with providing simplified templates or guidance notes tailored to suppliers unfamiliar with EU environmental reporting. Others leaned on industry associations or local chambers of commerce to bridge gaps in understanding. There was no uniform solution, which, ironically, reflected the fragmented nature of global supply chains the taxonomy sought to make more transparent.
Integration with open EUTax datasets became a crucial enabler of this work. These data resources, while not always as user-friendly as compliance teams might have wished, offered standardized classifications of economic activities, emissions benchmarks, and sector-specific technical criteria that allowed managers to check supplier claims against an external, verifiable source. Supply-chain teams learned to extract supplier-level sustainability metrics from these datasets, mapping them back to their procurement master data and categorizing suppliers by sector, geography, and risk profile. This mapping was often iterative — initial matches would highlight gaps in supplier disclosures, prompting further queries or requests for clarification. In a few cases, firms piloted automated data extraction or artificial intelligence tools to streamline the matching of supplier activities to taxonomy criteria, though these technologies were still in their infancy and frequently required manual validation.
Annual taxonomy-alignment reporting added another layer of complexity. Firms were expected not only to present the proportion of their activities (and by extension, their supply chains) that aligned with the taxonomy’s environmental objectives but to do so in a manner that was auditable and defensible. The process involved more than publishing aggregated percentages or generic commitments. Companies needed to demonstrate, through documentation and data, how alignment had been assessed and what criteria had been applied.
Many chose to structure these reports around the key environmental objectives, providing narrative explanations alongside quantitative data. This included case studies of suppliers who met or exceeded the taxonomy’s screening thresholds, as well as disclosures about suppliers who did not yet comply and what steps were planned to address those gaps. A few firms took the additional step of publishing detailed supplier engagement plans, outlining how they would support critical suppliers in transitioning toward taxonomy alignment — though these documents often struck a cautious tone, reflecting uncertainty about how quickly suppliers could or would respond.
Interestingly, taxonomy-alignment reports also revealed internal challenges. Supply-chain teams sometimes found themselves at odds with commercial or operational colleagues who prioritized cost, lead times, or established supplier relationships over environmental performance. Balancing these competing priorities introduced tension into reporting processes, as firms tried to meet regulatory requirements without destabilizing critical supply lines. This tension was not always resolved cleanly. Some reports included qualifiers or caveats, acknowledging that full alignment was a work in progress and that certain supplier categories would require multi-year engagement or, in some cases, replacement. Investors and other stakeholders appeared, in many cases, to accept this realism — perhaps recognizing that the scale of the task made immediate full compliance improbable.
There was also an emerging consensus that taxonomy reporting, while burdensome, offered long-term benefits beyond regulatory compliance. By mapping suppliers against environmental objectives, companies began to gain new insights into supply-chain risks and opportunities that might otherwise have remained hidden. The process surfaced inefficiencies, highlighted areas for innovation, and in some cases spurred partnerships with suppliers on joint sustainability initiatives. Some supply-chain managers spoke of the taxonomy exercise as a catalyst for deeper, more constructive supplier relationships — though again, these accounts were balanced by stories of frustration and friction, particularly in sectors or regions where environmental reporting had not previously been a priority.
For supply-chain managers tasked with preparing these reports, the path forward seemed clear in outline, if challenging in detail. It involved continuing to refine supplier inventories, strengthening data collection protocols, and embedding taxonomy alignment checks into procurement workflows. Integration with ERP systems, particularly those modules focused on supplier management and risk assessment, was increasingly seen as essential. A few leading firms began experimenting with publishing their taxonomy-alignment reports as part of broader sustainability or integrated annual reports, seeking to align external communications with internal management processes. The choice of how to present these reports — how much detail to provide, how candid to be about gaps — remained a matter of judgment, shaped by company culture, regulatory expectations, and stakeholder pressure.
What remained uncertain, and a source of ongoing debate, was how the taxonomy would evolve and how regulators would respond to the inevitable variations in how firms interpreted and applied the rules. Some supply-chain teams worried about the potential for retrospective audits or penalties if their alignment methodologies were later found wanting. Others expressed concern that without clearer guidance on supplier-level disclosures, taxonomy reporting would continue to rely on best efforts rather than hard verification. These tensions, unresolved as of 2021, pointed to the likelihood that taxonomy-alignment reporting would remain an area of focus, challenge, and innovation for years to come.