EU Taxonomy Regulation Practical Guide: 4 Criteria, 6 Objectives, and Disclosure Obligations

The EU Taxonomy Regulation (Regulation (EU) 2020/852), which entered into force on July 12, 2020, is a cornerstone of the European Green Deal. It legally establishes a common definition of "environmentally sustainable economic activities" and requires both financial and non-financial companies to disclose information based on unified criteria. The European Commission’s official page describes the Taxonomy as a framework that provides an investment classification system aligned with the 2050 net-zero pathway and the 2030 climate and energy targets. Preventing greenwashing and protecting investors are among its primary objectives.

The Taxonomy is directly linked to disclosure obligations under the CSRD (Corporate Sustainability Reporting Directive). Companies subject to the CSRD are required to disclose their Taxonomy-eligible and Taxonomy-aligned ratios in their sustainability reports. As the CSRD captures not only large companies but their entire value chain, companies and suppliers outside the EU are increasingly being required, indirectly, to comply with Taxonomy disclosures.

The Six Environmental Objectives and Delegated Act Application Schedule

The Taxonomy Regulation defines 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) pollution prevention and control, and (6) protection and restoration of biodiversity and ecosystems.

The disclosure schedule varies by objective. For climate objectives (1 and 2), the Delegated Act (2021/2139) entered into force in January 2022, and companies subject to the CSRD have been disclosing climate-related Taxonomy ratios since that fiscal year. For the remaining four objectives (3–6), the Environmental Delegated Act (2022/1214) was formulated, and disclosures have been gradually expanded since 2023. The European Commission continues to revise the Delegated Acts, and since technical screening criteria for specific sectors may be updated, it is necessary in practice to regularly check EUR-Lex and the European Commission’s official page.

Four Conditions: Criteria for Environmental Eligibility

For an economic activity to be considered "Taxonomy-aligned," it must meet all four of the following conditions:

① Substantial Contribution: Substantially contribute to at least one of the six objectives while meeting the technical screening criteria specified by the Delegated Acts. "Transition activities" for climate mitigation require alignment with a 1.5°C pathway, and power generation from solid fossil fuels is explicitly excluded.

② Do No Significant Harm (DNSH): Do not cause significant harm to any of the other five objectives while contributing to the claimed objective. If an activity claims to contribute to climate mitigation but causes significant adverse impacts on water resources or biodiversity, it is considered ineligible.

③ Minimum Safeguards: Implement a due diligence process aligned with the OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights (UNGPs), and the ILO Core Labour Standards.

④ Compliance with Technical Screening Criteria (TSC): Meet the industry-specific quantitative and qualitative criteria (e.g., CO2 emission thresholds, energy-saving requirements) specified in the annexes of each Delegated Act. Criteria differ by activity type, requiring detailed internal assessment.

The process of confirming these four conditions is carried out in cooperation with a company’s environmental, finance, and legal departments. There is also an increasing number of cases where limited assurance from third parties is obtained.

Disclosure Obligations: Three Indicators and Special Provisions for Financial Institutions

Article 8 of the Taxonomy Regulation obliges large companies subject to the CSRD to annually disclose the Taxonomy-eligibility and Taxonomy-alignment ratios of their turnover, capital expenditure (CapEx), and operating expenditure (OpEx). "Eligible" indicates whether an activity can, in principle, be related to any of the six objectives, while "aligned" is the concept indicating that all four conditions have been met. In corporate reporting practice, this begins with mapping the business portfolio to activity classification codes, followed by finalizing figures through matching with TSC data (emissions, energy consumption, etc.), DNSH assessment, and confirmation of minimum safeguards.

Financial institutions disclose their Green Asset Ratio (GAR), trading portfolio ratios, and more. The Taxonomy Navigator (four types of digital tools) provided by the European Commission can be used to confirm the eligibility of economic activities and refer to Delegated Act texts.

Ripple Effects on Non-EU Companies and Suppliers

Although the Taxonomy is an EU internal law, it impacts non-EU companies through the following channels. First, CSRD value chain disclosure: As large EU companies must disclose material issues across their entire value chain, there are increasing instances of them requesting CapEx plans and environmental performance data for facilities from non-EU suppliers. Second, SFDR Taxonomy ratio disclosure: As Art. 9 funds must disclose Taxonomy-alignment ratios, non-EU companies may be requested to provide this data by investors. Third, the EU Green Bond Standard (EU GBS) requires Taxonomy alignment, so non-EU companies issuing green bonds in the EU market also need to comply.

For non-EU companies, practical compliance starts with a three-step process: (1) initial mapping to identify which activity code in the Delegated Act annexes their main business corresponds to, (2) preparing emissions data against the TSC in the Climate Delegated Act, and (3) building a framework for DNSH assessment.

Practical Checklist

There are seven items in the checklist for Taxonomy compliance: 1) Activity Mapping: Map major business activities to the activity classification codes in the Delegated Act annexes. 2) Eligibility Assessment: Confirm substantial contribution against the TSC for the six objectives. 3) DNSH Assessment: Confirm impacts on the other five objectives, both quantitatively and qualitatively. 4) Minimum Safeguards Confirmation: Document the implementation status of human rights due diligence and OECD/UN/ILO standards. 5) Calculation of the three indicators: Link with financial systems and project management data. 6) Third-party Assurance: Consider obtaining limited assurance for CSRD compliance. 7) Tracking Delegated Act Updates: Regularly check EUR-Lex and the European Commission’s official page.

Taxonomy reporting centers on the "classification of facts" and "management of evidence." Eligibility assessment is not a one-time task but requires annual review based on revisions to Delegated Acts, changes in business portfolios, and updates to emission data. Instead of only tracking disclosure ratios, building a ledger of supporting data for TSC and DNSH assessments is the shortest route to responding to both auditors and investors.

Reference FactCards