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EU Taxonomy: How Companies Are Adapting to Green Classification Rules

Sustainability & ESG / December 11, 2025

By Mary Riddle, Vice President, Sustainability Strategy

When the European Union introduced the Taxonomy Regulation in 2018, it set out to do something that may seem simple on its surface: define, with technical precision, what counts as a “sustainable” activity.

In practice, the EU Taxonomy has been anything but simple. Despite its complexity, this classification system has become critical for capital allocation, corporate strategy, and disclosure across Europe and beyond. A company falls under the EU Taxonomy disclosure requirements if and when it is subject to the Corporate Sustainability Reporting Directive (CSRD) going forward. EU Taxonomy disclosures go into CSRD-aligned reports.

What is the EU Taxonomy?

To achieve genuine resilience, organizations must assess and integrate three often-sidelined environmental pillars into their core strategy: water, biodiversity, and natural disaster mitigation.

Water Resources

The EU Taxonomy is a classification system that maps a company’s economic activities to six environmental objectives and prescribes technical screening criteria to determine whether an activity can or cannot be qualified as sustainable.

Companies are required to disclose their share of turnover, CapEx, and OpEx that is and is not sustainable. (Or, as it is referred to in the regulation “taxonomy-eligible” and “taxonomy-aligned.”)

For an economic activity to be considered “environmentally sustainable” under the EU Taxonomy, it must meet all four of these criteria:

Substantial Contribution (SC)
The activity must substantially contribute to at least one of the Taxonomy’s six environmental objectives (listed below), according to detailed Technical Screening Criteria (also listed below).
Do No Significant Harm (DNSH)
The activity must not significantly harm any of the other five objectives. For example, a hydropower plant may help mitigate climate change, but if it causes major biodiversity loss, it fails the DNSH and cannot be qualified as a sustainable activity.
Minimum Safeguards
The activity must comply with certain social and governance safeguards, notably OECD Guidelines for Multinational Enterprises, UN Guiding Principles on Business and Human Rights, Core conventions of the International Labour Organization (ILO), and the International Bill of Human Rights.
Compliance with Technical Screening Criteria (TSC)
The TSC are science-based quantitative and qualitative thresholds that say what “sustainable” looks like in each industry. They are different for every sector, updated as technology and science evolve.

The Six Environmental Objectives

As mentioned, for a business’s economic activity to be considered sustainable, it has to make a significant contribution to at least one of the six environmental objectives set forth by the Taxonomy. Those environmental objectives are:

Climate Change Mitigation
Activities that contribute to reducing or preventing greenhouse gas emissions (renewable energy installations, technologies that improve energy efficiency, low-carbon transport).

Climate Change Adaptation
Activities that reduce the risk of negative climate impacts or increase climate resilience (flood defenses, urban heat reduction, research and development of drought-resistant crops).

Sustainable Use and Protection of Water and Marine Resources
Activities that ensure sustainable water use and protect aquatic ecosystems (water treatment facilities, fishing innovations that help prevent marine pollution).

Transition to a Circular Economy
Activities that support resource efficiency, durability, recycling, reuse, and reduced waste (recycling facilities, product life extension, use of secondary raw materials).

Pollution Prevention and Control
Activities that prevent or reduce emissions of pollutants into air, water, and land (clean production technologies, microplastic filters)

Protection and Restoration of Biodiversity and Ecosystems
Activities that conserve, restore, and enhance biodiversity and ecosystem services afforestation, ecosystem restoration projects).

Companies must determine which of their activities are considered sustainable based on these criteria. For non-financial companies, Article 8 requires the disclosure of the proportion of turnover, CapEx, and OpEx associated with taxonomy-eligible (or non-sustainable) and taxonomy-aligned (sustainable) activities. Financial institutions have parallel KPI requirements tailored to their products and portfolios.

The EU Taxonomy is not the same thing as CSRD, but they are connected. CSRD takes the Taxonomy into account, knitting together climate-and-finance disclosure under the same umbrella and ensuring that sustainability data connects to financial statements and strategy. EU Taxonomy disclosures are included in CSRD-aligned reports.

How companies are operationalizing Taxonomy compliance

For CFOs and sustainability teams, the immediate implication is that sustainable finance and corporate disclosure are converging. KPIs on taxonomy-aligned activities influence internal capital budgeting, investor dialogue, and the cost of capital.

If you’re responsible for your company’s Taxonomy KPIs, here’s how to get started:

Map your activity stack. Build a canonical list of economic activities; assign a Taxonomy code to each revenue stream, CapEx project, and major OpEx bucket.
Evidence, then numbers. For each potentially eligible activity, assemble evidence of substantial contribution, DNSH, and minimum safeguards before calculating KPIs. Keep all evidence for each economic activity.
Segment your KPIs. Report “taxonomy-alignment” by segment and by activity so executives can see where to push. This is especially important for diversified manufacturers.
Integrate ESRS & finance. Connect Taxonomy KPIs to CSRD-required climate and resource disclosures and reconcile them to the financial statements. Prepare for assurance.

Bottom Line

Treat the Taxonomy as a data product, not a spreadsheet. Build an activity inventory mapped to the Taxonomy, with evidence logs for substantial contribution, DNSH, and minimum safeguards. Integrate any engineering specs (emissions intensity thresholds and lifecycle assessments), permitting documents, and EHS controls.

Doing this once, and doing this well, enables repeatable, audit-ready KPIs across turnover, CapEx, and OpEx.

Companies that treat Taxonomy alignment as a capital allocation rule, embed it in investment gates, and align their financing frameworks are already reaping the benefits: cheaper capital, clearer investor narratives, and competitive positioning in procurement and policy-driven markets.

Meeting new classification rules can feel complex, but the right guidance can turn compliance into opportunity. At OBATA, we help companies assess eligibility and prepare disclosures that satisfy regulators and stakeholders alike.

Contact us today for a free consultation and learn how OBATA can support your team in building a clear path toward EU Taxonomy alignment.

Frequently Asked Questions

What is the primary link between the EU Taxonomy and the CSRD?

The Corporate Sustainability Reporting Directive (CSRD) mandates that companies subject to its requirements must include EU Taxonomy disclosures in their CSRD-aligned reports.

What are the four main criteria for an economic activity to be considered sustainable under the EU Taxonomy

The four criteria are Substantial Contribution (SC), Do No Significant Harm (DNSH), Minimum Safeguards, and Compliance with Technical Screening Criteria (TSC).

Contact us today for a free consultation and learn how OBATA can support your team in building a clear path toward EU Taxonomy alignment.