EU taxonomy: Classifying sustainable economic activities

Why the EU taxonomy – and why it is strategically relevant for companies

The EU taxonomy is the EU’s central classification system for defining which economic activities are considered environmentally sustainable. The aim is to direct capital flows toward sustainable activities and prevent greenwashing.

For companies, this means in concrete terms:

• Banks and investors are increasingly evaluating portfolios based on taxonomy KPIs.
• Companies subject to reporting requirements must disclose, in accordance with Article 8 of the Taxonomy Regulation (EU) 2020/852, what proportion of their revenue, capex, and opex is taxonomy-eligible or taxonomy-compliant.
• In combination with CSRD/ESRS, the EU taxonomy is becoming a relevant control instrument for strategy, investments, and communication.

In short, taxonomy is not purely a compliance issue, but a lever for positioning oneself as a sustainable market player and securing financing conditions.

What is the EU taxonomy?

The legal basis is Regulation (EU) 2020/852, which creates a uniform, binding system for classifying environmentally sustainable economic activities.

An activity is considered environmentally sustainable if it:

• makes a substantial contribution to at least one of the six environmental objectives,
• does not cause any significant harm (Do No Significant Harm – DNSH) to any of the other environmental objectives,
• complies with minimum social protection standards (including UN Guiding Principles, OECD, ILO),
• meets the technical screening criteria.

These criteria are specified in detail in several delegated acts (Climate Delegated Act, Environmental Delegated Act, etc.).

The six environmental objectives of the EU taxonomy

The EU taxonomy focuses on six environmental objectives:

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. Prevention and reduction of environmental pollution
6. Protection and restoration of biodiversity and ecosystems

For individual activities (e.g., energy, buildings, transport, industrial processes), specific thresholds and requirements are defined in the delegated acts, e.g., maximum emission intensity of electricity generation, energy efficiency classes of buildings, or recycling rates.

Four core elements: When is an activity “taxonomy-compliant”?

4.1 Substantial contribution

An activity must make a substantial contribution to at least one environmental objective, e.g.:

• Electricity generation from renewable energies to decarbonize the energy system,
• energy-efficient building renovation to significantly reduce energy consumption,
• recycling processes as a contribution to the circular economy.

The technical criteria specify in detail when an activity is considered a substantial contribution (e.g., thresholds for g CO₂/kWh or efficiency gains).

Do No Significant Harm (DNSH)

At the same time, the activity must not cause any significant harm to the other environmental objectives, such as:

• Water protection despite energy projects,
• no serious impairment of biodiversity due to infrastructure,
• no displacement of emissions to other environmental compartments.

DNSH requirements are also technically documented (e.g., requirements for environmental impact assessments, emission limits).

Minimum Safeguards

Companies must comply with fundamental social and governance standards:

• UN Guiding Principles on Business and Human Rights
• OECD Guidelines for Multinational Enterprises
• ILO Core Labor Standards

If activities violate these minimum safeguards, they are not considered taxonomy-compliant, even if they have a good environmental profile.

Technical screening criteria

The criteria define specifically:

• which activities are addressed (taxonomy activity list),
• which threshold values and process requirements must be met,
• which evidence is required (e.g., certificates, studies, expert opinions).

These criteria are continuously being expanded and refined—e.g., through the Climate Delegated Act (climate targets) and the Environmental Delegated Act (water, circular economy, pollution, biodiversity).

Taxonomy-eligible vs. taxonomy-aligned—the difference

In practice, the distinction is important:

• Taxonomy-eligible:
• The activity formally falls under a defined taxonomy activity (e.g., “installation of solar parks”).
• Taxonomy-aligned:
• In addition to the pure classification, the activity meets all four criteria (material contribution, DNSH, minimum protection, technical criteria).

Both variables are relevant for reporting:

• The proportion of taxonomy-eligible revenues/investments shows where there is fundamental potential,
• while the proportion of taxonomy-aligned revenues/investments shows the actual “green quality” of business activities.

Who is affected – and how?

The following are primarily affected:

• Large capital market-oriented companies and certain banks/financial market players,
• companies that fall under the CSRD (rolled out gradually), as they must also disclose taxonomy KPIs in accordance with Art. 8 in their sustainability reports,
• and companies that want to position themselves strategically for sustainable financing (e.g., green bonds, sustainability-linked loans).

Even medium-sized companies that are not directly subject to reporting requirements are coming under indirect pressure, e.g., through:

• Customer requirements (taxonomy data in supplier questionnaires),
• banks that use taxonomy indicators to assess credit portfolios (green asset ratio).

Procedural model: 6 steps to EU taxonomy classification

Step 1: Clarify governance & target vision

• Define responsibility within the company (e.g., CFO + ESG/CSRD managers).
• Define target vision: Simply fulfill disclosure requirements – or actively position yourself as a “taxonomy champion”?

Step 2: Activity mapping

• Break down the business model into economic activities (products, services, projects).
• Compare with the taxonomy activity list:
  • Which activities are taxonomy-eligible?
  • Which parts of revenue, capex, and opex are linked to these activities?

Step 3: Check technical criteria

For each taxonomy-eligible activity:

• Identify relevant delegated acts (climate/environmental targets),
• threshold values, process requirements, and mandatory evidence,
• conduct technical review by experts (e.g., technology, EHS, CSR, external consulting).

Result: List of activities that may be potentially taxonomy-compliant – and those that do not (yet) meet all requirements.

Step 4: Ensure DNSH & minimum safeguards

• Assess whether DNSH criteria are met (e.g., EIA, thresholds, certifications).
• Review minimum safeguards: governance, human rights, labor standards.
• Document evidence (policies, certificates, audits, reports).

Step 5: Calculate taxonomy KPIs

Three key indicators are required for disclosure under Article 8:

• Revenue KPI: Proportion of net revenue from taxonomy-compliant activities.
• Capex KPI: Proportion of capital expenditure (capex) that is taxonomy-compliant or leads to such alignment.
• Opex KPI: Proportion of selected operating expenses (opex) related to taxonomy (e.g., maintenance, short-term measures).

A data model that can also be used for CSRD/ESRS in the future is worthwhile here.

Step 6: Reporting & communication

• Integration of taxonomy KPIs into the sustainability report (e.g., ESRS E1/G1 section and separate taxonomy section).
• consistency with financial reporting and investor relations.
• communication strategy to avoid greenwashing risks while clearly communicating the added value.