EU Taxonomy Guide

Screen your activities for EU Taxonomy alignment Activity eligibility and alignment assessment across all 6 environmental objectives.

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What is it?

The EU Taxonomy Regulation

The EU Taxonomy Regulation (Regulation (EU) 2020/852) is the cornerstone of the EU's sustainable finance framework. It establishes a unified classification system that defines which economic activities can be labelled as environmentally sustainable — providing a common language for companies, investors, and financial institutions to describe the sustainability of their business activities with clarity and comparability.

Before the EU Taxonomy existed, claims about "green" or "sustainable" business activities were largely unverified and inconsistent. A manufacturing company might call itself sustainable based on a carbon reduction initiative, while a real estate company used the same term based on energy-efficient buildings. The Taxonomy creates a single, technical standard against which all claims must be measured — backed by detailed Technical Screening Criteria developed by the European Commission's Platform on Sustainable Finance with expert input from scientists, industry, and civil society.

The Taxonomy is not a prohibition: it does not tell companies they cannot engage in non-taxonomy-aligned activities. Instead, it creates a disclosure obligation: companies in scope of CSRD (previously NFRD) must calculate and publicly report what percentage of their net turnover, capital expenditure (CapEx), and operating expenditure (OpEx) is taxonomy-aligned. This enables investors to compare the "green share" of different companies on a like-for-like basis.

The financial markets dimension is equally important. Financial market participants — banks, asset managers, insurance companies — must disclose the Taxonomy alignment of their financial products under the Sustainable Finance Disclosure Regulation (SFDR). A fund marketing itself as an Article 9 "sustainable investment" fund must quantify and disclose the Taxonomy alignment of its portfolio, creating significant downstream demand for Taxonomy disclosures from investee companies.

Six environmental objectives

The EU Taxonomy covers six objectives

The Taxonomy assesses economic activities against six environmental objectives. An activity must substantially contribute to at least one objective without significantly harming any of the other five (the DNSH principle):

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Objective 1

Climate Change Mitigation

Activities that substantially reduce or avoid GHG emissions, or enhance GHG removals. Currently the most developed objective.

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Objective 2

Climate Change Adaptation

Activities that substantially reduce the adverse impact of climate change, including increased variability of climate, on the activity itself or on people, nature, and assets.

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Objective 3

Sustainable Use of Water

Activities that substantially contribute to the sustainable use and protection of water and marine resources.

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Objective 4

Circular Economy

Activities that substantially contribute to transitioning to a circular economy, including waste reduction, recycling, and extending product lifetimes.

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Objective 5

Pollution Prevention

Activities that substantially contribute to prevention and control of pollution of air, water, or land, including reducing emissions of hazardous substances.

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Objective 6

Biodiversity & Ecosystems

Activities that substantially contribute to the protection and restoration of biodiversity and ecosystems, including sustainable agriculture and fisheries.

Three conditions for alignment

When is an activity taxonomy-aligned?

For an economic activity to be classified as taxonomy-aligned, it must simultaneously satisfy all three of the following conditions:

Substantial Contribution

The activity must substantially contribute to at least one of the six environmental objectives, as defined by the Technical Screening Criteria (TSC) in the relevant Delegated Act.

Do No Significant Harm

The activity must not significantly harm any of the other five environmental objectives. Separate DNSH criteria are specified for each objective in the Delegated Acts.

Minimum Social Safeguards

The activity must be carried out in compliance with minimum social safeguards — specifically, the OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

Key concepts

Terms you need to know

Taxonomy-Eligible vs. Taxonomy-Aligned

Eligibility means an activity is in principle covered by the Taxonomy (it appears in the Delegated Acts). Alignment means the activity actually meets all the TSC, DNSH, and social safeguard conditions. Both must be reported separately.

Technical Screening Criteria (TSC)

Specific, quantitative criteria for each activity defining what "substantial contribution" and "do no significant harm" mean in practice. TSC are set out in Delegated Regulations and are reviewed periodically.

The Three KPIs

Companies must report three financial KPIs: the share of taxonomy-aligned/eligible net turnover, CapEx (capital expenditure), and OpEx (operational expenditure). Each KPI must be reported as both eligible and aligned percentages.

Delegated Acts

The TSC are set out in Delegated Regulations adopted by the Commission. The Climate Delegated Act (2021) covers climate objectives 1 and 2. The Environmental Delegated Act (2023) covers objectives 3–6. Further updates are expected.

Enabling and Transitional Activities

The Taxonomy recognises two special categories: "transitional activities" (activities with no low-carbon alternative but on a transition trajectory, e.g. natural gas in specific contexts) and "enabling activities" (activities that enable others to be sustainable, e.g. manufacturing wind turbine components).

DNSH Principle

Do No Significant Harm — the condition that an activity, while substantially contributing to one objective, must not cause significant harm to the other five. DNSH tests vary by activity and are often the most technically complex part of Taxonomy assessment.

Core obligations

Who must report and what

Large companies subject to CSRD/NFRD must disclose three KPIs: turnover %, CapEx %, and OpEx % that are taxonomy-eligible and taxonomy-aligned, broken down by environmental objective, in their annual sustainability report.
Financial market participants under SFDR must disclose the Taxonomy alignment of their financial products — Article 9 products must set minimum Taxonomy alignment targets and report actual alignment annually.
All in-scope companies must first report taxonomy-eligibility (which activities appear in the Delegated Acts) before progressing to taxonomy-alignment (which activities actually meet the TSC and DNSH conditions).
CapEx plans must be described for activities that are not yet aligned but are on a credible transition trajectory toward alignment — allowing companies to demonstrate forward-looking investment in taxonomy-aligned activities.
Assurance is required as part of CSRD reporting — Taxonomy KPIs are included in the sustainability report subject to independent limited assurance from the company's auditor or assurance provider.

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Taxonomy-Eligible vs. Taxonomy-Aligned: The Critical Distinction

One of the most common sources of confusion in EU Taxonomy reporting is the difference between eligibility and alignment — and the requirement to report both separately. Eligibility means the activity is covered by the Taxonomy's Technical Screening Criteria — it is listed in one of the Delegated Acts. An activity can be eligible without being aligned. Alignment requires the activity to actually meet all the TSC thresholds for substantial contribution, pass all DNSH tests, and confirm minimum social safeguards are in place.

In Year 1 of reporting, many companies found that their eligible percentage was significant but their aligned percentage was much lower — because they could not yet verify the detailed TSC conditions for their activities. This reporting trajectory (eligible first, aligned to follow) is acceptable and expected, provided companies have a credible plan to improve alignment over time.

Technical Screening Criteria: Examples by Sector

Electricity Generation from Solar PV

Substantial contribution to Climate Objective 1: manufacture and installation of solar photovoltaic systems substantially contributes to climate mitigation. DNSH assessment requires: water efficiency measures, waste management during installation, no significant impact on biodiversity-sensitive areas, and protection against pollution. Social safeguards require compliance with OECD Guidelines on supply chains (including risk of polysilicon from forced-labour regions).

Construction of New Buildings

New buildings substantially contribute to climate mitigation if primary energy demand is at least 10% lower than the threshold set for nearly zero energy buildings (NZEB) in national legislation. DNSH for water requires water-efficient technologies. DNSH for circular economy requires at least 70% of construction waste to be diverted from disposal. DNSH for biodiversity prohibits construction in protected areas.

Road Transport

Zero direct (tailpipe) emission vehicles substantially contribute to climate mitigation. Electric cars and vans are taxonomy-eligible and can be aligned if they meet specific lifecycle conditions. Conventional petrol and diesel vehicles are not eligible for substantial contribution to climate mitigation but may be eligible under the circular economy objective in specific contexts (e.g. vehicle remanufacturing).

KPI Calculation Methodology

KPI	Numerator	Denominator	Key considerations
Turnover	Net revenue from taxonomy-aligned activities	Total net turnover	Where activities serve both aligned and non-aligned purposes, revenue must be allocated proportionally. Consolidated group figures required.
CapEx	Capital expenditure related to taxonomy-aligned activities or assets	Total capital expenditure	Includes CapEx plans (investments not yet aligned but on a trajectory to alignment). Particularly important for capital-intensive industries.
OpEx	Direct costs related to R&D, short-term leases, maintenance of taxonomy-aligned assets	Total relevant OpEx (maintenance, repair, R&D, short-term leases)	OpEx is narrowly defined — not total operating costs. Excludes salaries, overheads, depreciation.

Climate and Environmental Delegated Acts

The Climate Delegated Act (Delegated Regulation (EU) 2021/2139, subsequently amended) covers Taxonomy Objectives 1 (climate mitigation) and 2 (climate adaptation). It includes Technical Screening Criteria for over 90 economic activities across energy, transport, buildings, manufacturing, water, waste, and ICT sectors. The Climate Delegated Act is the most widely applied portion of the Taxonomy and the focus of most companies' initial Taxonomy assessment work.

The Environmental Delegated Act (Delegated Regulation (EU) 2023/2485) covers Taxonomy Objectives 3 (water), 4 (circular economy), 5 (pollution), and 6 (biodiversity). It entered into application for reporting from FY2024 onwards. Companies that had only assessed climate objectives in prior years must now also assess alignment against all four environmental objectives — significantly expanding the scope of TSC analysis required.

Sector Deep-Dives

Real Estate

Real estate is one of the sectors with the most detailed Taxonomy coverage. Building renovation and construction activities, as well as the acquisition and ownership of buildings, can be taxonomy-aligned. A key threshold: buildings must have an Energy Performance Certificate (EPC) of at least Class A to be considered aligned for acquisition/ownership under climate mitigation. Green building certifications (BREEAM Excellent, LEED Platinum) can serve as proxies in some jurisdictions. The EU Taxonomy is increasingly driving green building certification adoption across European real estate portfolios.

Energy

Renewable energy generation (solar, wind, hydropower) is covered with detailed TSC. Nuclear power generation has been added to the Climate Delegated Act under specific conditions (treated as a transitional activity). Natural gas is also treated as transitional under specific conditions related to lifecycle GHG emissions thresholds — a provision that has been the subject of significant controversy and legal challenge.

Finance

Financial institutions must calculate the "Green Asset Ratio" (GAR): the proportion of total assets (loans, bonds, equity) directed at taxonomy-aligned economic activities. Banks must disclose their GAR under both the CSRD and supplementary reporting requirements from the EBA. The calculation depends on obtaining Taxonomy disclosures from corporate borrowers and investees — creating significant demand pressure on companies to improve the quality and granularity of their Taxonomy disclosures.

Compliance Checklist

Confirm whether your company is in scope of EU Taxonomy reporting (CSRD or NFRD scope, or financial market participant under SFDR)

Map all economic activities of your group against the Climate Delegated Act and Environmental Delegated Act to identify which activities are taxonomy-eligible

Calculate the three eligibility KPIs (turnover %, CapEx %, OpEx %) as an initial baseline disclosure

For each eligible activity, review the specific Technical Screening Criteria for substantial contribution — identify any data gaps (e.g. energy performance data for buildings, emissions intensity data for manufacturing)

Conduct the Do No Significant Harm assessment for each eligible activity against all five other environmental objectives — document the DNSH evidence

Verify minimum social safeguards compliance — assess against OECD Guidelines, UN Guiding Principles, and the ILO Core Conventions

Calculate the three alignment KPIs based on confirmed TSC, DNSH, and social safeguard compliance

Develop CapEx plans for activities not yet aligned but on a taxonomy alignment trajectory — document in the CSRD sustainability report

Prepare the Taxonomy disclosure table in the required format for inclusion in the CSRD annual management report (delegated act disclosure format)

Ensure Taxonomy KPIs are subject to limited assurance as part of the overall CSRD assurance engagement

How to Use the Verdaio EU Taxonomy Screener

The Verdaio EU Taxonomy Screener guides you through the activity eligibility and alignment assessment process for your specific sector and business activities. The tool covers all activities listed in the Climate Delegated Act and Environmental Delegated Act, walks you through the relevant TSC thresholds for substantial contribution, and provides structured DNSH guidance for each activity. Output includes: eligible vs. aligned classification per activity, key data gaps preventing alignment, and a summary KPI calculation tool for turnover, CapEx, and OpEx reporting.

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