EU Taxonomy
The EU Taxonomy is a major classification system developed as part of the European Green Deal to identify and promote sustainable economic activities. It aims to direct capital flows toward projects that contribute to achieving climate neutrality by 2050 and is legally anchored in Regulation (EU) 2020/852. Companies and financial market participants are required under the regulation to report on their environmentally sustainable activities.
The six environmental objectives of the EU Taxonomy
An economic activity is considered taxonomy-aligned if it makes a substantial contribution to at least one of six defined environmental objectives: climate change mitigation, adaptation to climate change, the sustainable use of water resources, the transition to a circular economy, pollution prevention, and the protection of biodiversity and ecosystems. At the same time, it must not significantly harm the other five objectives, a principle known as "Do No Significant Harm" (DNSH), and must comply with minimum social safeguards, for example regarding human and labor rights.
Technical screening criteria and how they are applied
The European Commission sets out, through delegated acts, the specific technical criteria an economic activity must meet to qualify as a substantial contribution. These technical screening criteria are continuously extended to further sectors and objectives and regularly revised, meaning companies must continually adapt their taxonomy assessment to the current legal state.
In practice, each economic activity is checked to see whether it is even listed as taxonomy-eligible under the delegated acts, and if so, whether it actually meets the technical screening criteria. The climate change mitigation and adaptation objectives were the first to be underpinned with technical criteria, with the remaining four objectives following later, so the range of activities that can be fully assessed has expanded gradually since the regulation's introduction.
Reporting obligations and key metrics
Companies subject to reporting requirements must disclose three key metrics under the Taxonomy Regulation: the share of taxonomy-eligible and taxonomy-aligned turnover, the share of taxonomy-aligned capital expenditure (CapEx), and the share of taxonomy-aligned operating expenditure (OpEx). These metrics show investors what proportion of a company's business activities already meets the EU's strict environmental criteria and are closely tied to reporting under the Corporate Sustainability Reporting Directive (CSRD).
Reporting obligations apply in stages to different groups of companies: initially to large capital-market-oriented companies and financial market participants, and increasingly also to large non-capital-market-oriented companies that fall under the CSRD. The exact thresholds and timeline have shifted several times in recent years, so companies should regularly check their own reporting obligation status.
The EU Taxonomy in practice: challenges for businesses
For mid-sized manufacturing companies in particular, the EU Taxonomy presents a considerable data challenge: assessing whether individual activities, facilities, or product lines are taxonomy-eligible and aligned requires a detailed link between financial and sustainability data at the level of individual economic activities. Dedicated EU Taxonomy software helps companies systematically identify taxonomy-eligible activities, check DNSH criteria, and calculate the required metrics automatically.
The EU Taxonomy also has an indirect effect on suppliers and business partners of reporting companies: as large corporations increasingly request taxonomy-related data along their supply chain to substantiate their own CapEx and OpEx metrics, mid-sized suppliers not directly subject to reporting requirements also face such data requests, and benefit from knowing their own taxonomy-relevant activities early on.
Interaction with CSRD, ESRS, and SFDR
Because EU Taxonomy disclosures are an integral part of the CSRD sustainability report, it is worth closely aligning them with the rest of CSRD and ESRS reporting, for instance to collect data points only once and use them consistently across both parts of the report. A holistic ESG reporting solution reduces manual effort and the risk of inconsistencies between financial and sustainability data.
The EU Taxonomy is also closely linked to other European sustainability regulations, such as the Sustainable Finance Disclosure Regulation (SFDR) for financial market participants and the European Sustainability Reporting Standards (ESRS) under the CSRD. This alignment is intended to ensure that financial products, corporate reports, and investment decisions are all based on a consistent definition of environmental sustainability.
By setting clear, binding criteria for sustainable investment, the EU Taxonomy fosters transparency in financial markets and curbs the risk of greenwashing. It thereby makes a significant contribution to identifying economic activities that genuinely support environmental and social sustainability, and plays a central role in the transformation toward a resource-efficient, low-emission economy in Europe.
