The EU Taxonomy Regulation has become one of the most consequential pieces of sustainable finance legislation in the world. For companies subject to the Corporate Sustainability Reporting Directive, disclosure of Taxonomy-aligned revenues, capital expenditure, and operating expenditure is mandatory. Yet many sustainability teams find the Taxonomy difficult to navigate, with its layered technical screening criteria, six environmental objectives, and Do No Significant Harm (DNSH) requirements. This checklist breaks the process into manageable steps.
What the EU Taxonomy Is
The EU Taxonomy is a classification system that defines which economic activities can be considered environmentally sustainable. It does not prohibit non-aligned activities, but it requires companies to disclose what proportion of their business activities, revenues, and investments meet its criteria. Financial market participants use this data to determine whether a product qualifies as a sustainable investment under the Sustainable Finance Disclosure Regulation (SFDR).
The Taxonomy currently covers six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
To date, Climate Change Mitigation (Objective 1) and Climate Change Adaptation (Objective 2) are the most developed, with detailed Delegated Acts specifying Technical Screening Criteria (TSC) for dozens of sectors. Objectives 3 through 6 are expanding progressively.
The Three-Part Test for Taxonomy Alignment
For an economic activity to qualify as Taxonomy-aligned, it must pass all three of the following tests:
- Substantial Contribution (SC): The activity must make a substantial contribution to at least one of the six environmental objectives, as defined by the Technical Screening Criteria in the relevant Delegated Act.
- Do No Significant Harm (DNSH): The activity must not significantly harm any of the other five environmental objectives. DNSH criteria are specified for each activity in the Delegated Acts.
- Minimum Social Safeguards (MSS): The activity must be carried out in compliance with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including core labour standards.
Common misconception: An activity that substantially contributes to climate change mitigation but harms biodiversity does NOT qualify as Taxonomy-aligned. All three tests must be passed simultaneously. Failing the DNSH test on any objective fails the entire activity.
Step-by-Step Compliance Checklist
Step 1: Map Your Economic Activities
- Identify your company's revenue-generating activities at a sufficiently granular level (e.g., not just "manufacturing" but "manufacture of low-carbon technologies")
- Cross-reference each activity against the NACE code mapping in the Delegated Acts to determine whether a Taxonomy-eligible activity exists
- Document activities that are Taxonomy-eligible versus those for which no activity exists (non-eligible)
- Assign revenue, CapEx, and OpEx proportions to each eligible activity
Step 2: Apply Technical Screening Criteria
- Download the current Delegated Acts from the EU Official Journal for Objectives 1 and 2 (and Objectives 3-6 if applicable to your sector)
- For each eligible activity, identify the relevant TSC section in the Delegated Act
- Collect quantitative evidence that your activity meets the Substantial Contribution thresholds (e.g., GHG intensity per tonne of product, energy performance certificates for buildings, lifecycle GHG emissions for vehicles)
- Record and retain supporting evidence for each criterion met
Step 3: DNSH Assessment
- For each eligible activity, review the DNSH criteria for all five other objectives in the relevant Delegated Act annex
- Assess whether your activity meets each DNSH criterion or is exempt (many DNSH criteria are conditional on sector or activity type)
- Where DNSH criteria reference EU regulations (e.g., Water Framework Directive, Industrial Emissions Directive), verify that your operations are in compliance
- Document your DNSH assessment conclusions with references to supporting evidence
Step 4: Minimum Social Safeguards
- Confirm that your organisation has a human rights due diligence process in place consistent with the UN Guiding Principles
- Verify compliance with the ILO core labour standards (no forced labour, no child labour, freedom of association, non-discrimination)
- Confirm anti-corruption and anti-bribery policies are in place and applied
- Document the MSS assessment and the policies that substantiate it
Step 5: Calculate KPIs and Prepare Disclosures
- Calculate the proportion of Taxonomy-eligible and Taxonomy-aligned revenue (Turnover KPI)
- Calculate the proportion of Taxonomy-eligible and Taxonomy-aligned capital expenditure (CapEx KPI)
- Calculate the proportion of Taxonomy-eligible and Taxonomy-aligned operating expenditure (OpEx KPI) where applicable
- Prepare the mandatory disclosure tables specified in the Taxonomy Delegated Act on Article 8 (Disclosures Regulation)
- Describe the plan for increasing Taxonomy-aligned proportions over time (required under CSRD)
Common Compliance Gaps
Gap 1: Insufficient Technical Documentation
The most common audit finding is that companies claim Taxonomy alignment without retaining the supporting evidence required by the TSC. For example, claiming climate change mitigation alignment for a manufacturing facility without documented GHG intensity measurements per unit of output leaves the disclosure vulnerable. Every alignment claim must be traceable to a specific, dated piece of evidence.
Gap 2: Incomplete NACE Mapping
Some organisations apply a narrow reading of the Taxonomy and only assess activities that are obviously relevant. A logistics company, for instance, might assess its road freight operations but overlook warehousing, which has its own Taxonomy activity for energy-efficient buildings. A full NACE mapping exercise across all revenue streams is required.
Gap 3: Treating Eligibility as Alignment
Taxonomy-eligible means an activity exists in the Taxonomy. Taxonomy-aligned means the activity meets all three tests. These are separate disclosures with separate KPIs. Companies that report only eligibility figures, or conflate the two, will face regulatory scrutiny under CSRD assurance requirements.
Gap 4: Ignoring CapEx Plans
The CapEx KPI captures both current Taxonomy-aligned capital expenditure and CapEx directed at becoming aligned in the future (so-called enabling activities and transition activities). Companies investing in decarbonisation projects that are not yet operational can still capture alignment credit through the CapEx plan disclosure, provided they have a documented plan and budget.
Technology Support for Taxonomy Reporting
Carbon tracking software increasingly includes EU Taxonomy modules that automate the activity mapping, evidence repository management, and KPI calculation steps. The most important features to look for are: a built-in mapping of NACE codes to Taxonomy activities, structured evidence collection workflows that capture supporting documents alongside TSC assertions, and automated generation of the Annex disclosure tables required by the Article 8 Delegated Act.
Manual spreadsheet-based Taxonomy assessments work for small companies with simple activity profiles but become unmanageable for diversified enterprises with activities across multiple sectors and DNSH criteria spanning six objectives. At that scale, a dedicated platform with versioned Delegated Act rules is not optional.
Looking Ahead
The EU Taxonomy is still evolving. Technical screening criteria for the remaining four environmental objectives are being phased in through additional Delegated Acts. Sector coverage is expanding, with new activities being added to Objectives 1 and 2. Companies should build their Taxonomy reporting infrastructure on a platform that is updated as the regulation develops, rather than locking into a static framework that will require manual updates each year.
