What the EU Taxonomy is — and is not
The EU Taxonomy Regulation (EU 2020/852) is a classification system that defines which economic activities qualify as 'environmentally sustainable.' It is not a rating system — it does not score companies. It is not a prohibition — it does not ban non-green activities. It is a definition: a standardised answer to the question 'what counts as green?' for the purposes of EU financial regulation.
The Taxonomy is the technical foundation beneath SFDR and CSRD. When a fund manager says their Article 9 fund invests in 'Taxonomy-aligned activities,' or when a company discloses their 'Taxonomy-eligible revenue,' they are using this classification system as the reference standard.
Why it matters beyond the EU
The EU Taxonomy is becoming a de facto global standard. The UK, Canada, Singapore, Japan, and several other jurisdictions have launched taxonomies modelled on the EU framework. If you understand the EU Taxonomy, you understand the template for global green finance classification.
The six environmental objectives
The Taxonomy covers six environmental objectives. An activity can qualify as sustainable by substantially contributing to at least one of these while not significantly harming any of the others (the DNSH test).
- Climate change mitigation — reducing greenhouse gas emissions
- Climate change adaptation — reducing vulnerability to climate impacts
- Sustainable use and protection of water and marine resources
- Transition to a circular economy — reducing waste, extending product life
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
As of 2025, Delegated Acts covering climate change mitigation and adaptation are in force (since 2022). The remaining four environmental objectives were covered by the Environmental Delegated Act in 2023. The Social Taxonomy remains under development.
The four-gate test for Taxonomy alignment
For an economic activity to be classified as Taxonomy-aligned, it must pass four gates in sequence. Failing any gate disqualifies the activity.
| Gate | Requirement | Example |
|---|---|---|
| 1. Eligible activity | Activity is listed in the Taxonomy | Solar power generation ✓; tobacco farming ✗ (not listed) |
| 2. Substantial contribution | Activity meets sector-specific technical screening criteria | Solar PV must meet minimum efficiency thresholds |
| 3. Do No Significant Harm | Activity does not significantly harm any of the other 5 objectives | A wind farm that damages a protected marine habitat fails this gate |
| 4. Minimum social safeguards | Company complies with OECD Guidelines, UN Guiding Principles, and ILO core labour standards | A compliant solar developer in a jurisdiction with documented forced labour in supply chain may fail |
Taxonomy disclosure requirements
Under CSRD and NFRD, large companies must disclose three Taxonomy KPIs for each objective:
- Taxonomy-eligible revenue: Revenue from activities that could potentially qualify (regardless of whether they meet screening criteria)
- Taxonomy-aligned revenue: Revenue from activities that pass all four gates
- Taxonomy-eligible and aligned CapEx: Capital expenditure directed toward eligible and aligned activities
- Taxonomy-eligible and aligned OpEx: Operating expenditure related to eligible activities
Eligible vs aligned — a critical distinction
Many companies report high Taxonomy eligibility (activities that are listed) but low Taxonomy alignment (activities that actually meet screening criteria). A 75% eligible / 12% aligned disclosure tells a very different story than 75% eligible / 68% aligned. Always look at the alignment number, not the eligibility number, when assessing genuine green activity.
The controversial inclusions: gas and nuclear
The Complementary Climate Delegated Act (July 2022) controversially classified certain natural gas and nuclear energy activities as Taxonomy-aligned transition activities under strict conditions. Gas qualifies if it replaces coal, meets specific emission thresholds, and transitions to hydrogen by 2035. Nuclear qualifies if waste management plans are in place and sites meet environmental safety standards.
These inclusions were politically contentious — France pushed for nuclear, Germany initially opposed gas. The compromise means Taxonomy-aligned disclosures from energy companies must be interpreted carefully, as they may include activities that are 'green by transition' rather than 'green by destination.'
How to use Taxonomy disclosures in ESG analysis
Taxonomy analysis checklist
- Find the Taxonomy table in the annual report (usually in the Non-Financial Statement or CSRD annex)
- Compare eligible vs aligned percentages — large gap signals aspirational rather than achieved green activity
- Check which objectives the company claims substantial contribution to
- Review DNSH disclosures — are they substantive or boilerplate?
- Check minimum social safeguards section for supply chain labour risk
- For financial companies: check the Green Asset Ratio (GAR) — proportion of loans/investments in Taxonomy-aligned activities
- Year-over-year trend: is alignment improving as CapEx is deployed?