EU Taxonomy: A Practical Guide for Corporate Sustainability Teams

The EU Taxonomy Regulation (2020/852) establishes a classification system for environmentally sustainable economic activities. If you are a large EU company subject to CSRD, you must disclose what percentage of your turnover, capital expenditure (CapEx), and operating expenditure (OpEx) is Taxonomy-eligible and Taxonomy-aligned.

Understanding the distinction — and the assessment process — is important before filing your first Taxonomy disclosure.

The Six Environmental Objectives

The EU Taxonomy defines six environmental objectives. An economic activity can be classified as sustainable if it substantially contributes to at least one, while doing no significant harm to the others, and complies with minimum social safeguards.

  1. Climate change mitigation
  2. Climate change adaptation
  3. Sustainable use and protection of water and marine resources
  4. Transition to a circular economy
  5. Pollution prevention and control
  6. Protection and restoration of biodiversity and ecosystems

The Climate Mitigation and Climate Adaptation delegated acts (2021) are the most developed. The four remaining objectives (Water, Circular Economy, Pollution, Biodiversity) were added via the Environmental Delegated Act (2023).

Eligibility vs. Alignment: The Two-Step Classification

This is where most companies make their first mistake. The Taxonomy requires two levels of classification:

Level 1: Taxonomy-Eligible

An activity is eligible if it is described in the Delegated Acts (i.e., there exists a TSC for it). Eligibility does not mean the activity is environmentally sustainable — only that it has been defined in the Taxonomy.

Example: Electricity generation from solar panels is listed in Annex I of the Climate Mitigation Delegated Act → therefore eligible.

Level 2: Taxonomy-Aligned

An activity is aligned only if it meets the full criteria:

  1. Substantial Contribution (SC): Meets the Technical Screening Criteria (TSC) for the relevant objective
  2. Do No Significant Harm (DNSH): Does not harm any of the other five objectives
  3. Minimum Social Safeguards (MSS): Complies with OECD guidelines, UNGC principles, and relevant ILO standards

The TSC have specific quantitative thresholds. For example, for electricity generation from solar photovoltaic:

  • Substantial Contribution to Climate Mitigation: Life-cycle GHG emissions below 100g CO₂e/kWh
  • DNSH assessments for water, biodiversity, circular economy, and pollution
  • MSS: OECD and UNGC compliance

The Three KPIs: Turnover, CapEx, OpEx

Companies must calculate and disclose:

KPI Definition
Turnover Revenue from Taxonomy-eligible / aligned activities ÷ total revenue
CapEx Taxonomy-eligible / aligned CapEx ÷ total CapEx
OpEx Taxonomy-eligible / aligned OpEx ÷ total OpEx

Each KPI is disclosed at two levels:

  1. Taxonomy-eligible (does the activity appear in the TSC?)
  2. Taxonomy-aligned (does the activity meet SC + DNSH + MSS?)

OpEx definition (often overlooked)

The EU Taxonomy defines OpEx narrowly for Taxonomy purposes: costs associated with research and development, short-term leases, building renovation, and maintenance of property, plant, and equipment. This is not the same as total operating expenses on the income statement.

Practical Assessment Process

Step 1: Activity mapping

Identify all economic activities in your business model. Map each activity to NACE codes. Check each NACE code against the published Delegated Acts to determine eligibility.

Step 2: Revenue allocation

For each Taxonomy-eligible activity, calculate the revenue it generates. For diversified businesses, this requires allocation at activity level — which your finance team must provide.

Step 3: TSC assessment

For each eligible activity, assess whether it meets the Substantial Contribution criteria. This is often highly technical:

  • Energy projects: life-cycle GHG calculations
  • Manufacturing: process emissions thresholds
  • Real estate: energy performance certificates

Step 4: DNSH assessment

For each eligible activity, assess whether it harms any of the five other objectives. The DNSH criteria are defined in the Delegated Acts. This typically requires:

  • Climate adaptation risk assessment
  • Location-based water stress analysis
  • Waste management assessment
  • Pollution screening
  • Biodiversity sensitivity of site locations

Step 5: Minimum social safeguards

Document compliance with OECD Due Diligence Guidelines and UNGC Principles. A policy statement alone is insufficient — evidence of implementation and due diligence procedures is required.

Step 6: KPI calculation

Sum eligible and aligned activities across your activity list. Calculate the three KPIs as percentages.

Common Pitfalls

1. Mis-classifying OpEx Many companies use their total operating expenses rather than the Taxonomy-defined narrow OpEx scope. This inflates the KPI base incorrectly.

2. DNSH shortcuts Simply asserting "no harm" without conducting the required assessments per the Delegated Acts will not satisfy auditors.

3. Not updating annually TSC thresholds may be revised. New activities are added to the delegated acts. Your eligibility and alignment assessments need reviewing each year.

4. CSRD/Taxonomy misalignment Your ESRS E1 disclosures and your Taxonomy reporting must be consistent. Contradictions between the two will raise audit flags.

Integration with CSRD and ESRS

ESRS 2 requires companies to disclose their EU Taxonomy KPIs as part of the general disclosures. The Taxonomy disclosures are therefore integral to your CSRD report — not a standalone exercise.

Emistra's EU Taxonomy module guides you through the activity mapping, TSC and DNSH assessments, minimum safeguards documentation, and KPI calculations — then populates the output directly into your ESRS and annual report. Start your Taxonomy assessment →