How to Conduct an EU Taxonomy Alignment Assessment: A Step-by-Step Guide

Why the EU Taxonomy Matters

The EU Taxonomy is a classification framework for environmentally sustainable economic activities. The EU Taxonomy Regulation (Regulation 2020/852), which entered into force in July 2020, established a uniform classification system to determine which economic activities qualify as "environmentally sustainable." The objective is to prevent greenwashing and direct sustainable investment flows.

Taxonomy alignment is the assessment process that determines whether an economic activity qualifies as sustainable under this classification system. While it may appear to be a simple checklist, it requires serious operational preparation.

The Five-Stage Assessment Process

Taxonomy alignment is a sequential five-stage assessment. Each stage requires the successful completion of the preceding one — failure at any stage means the activity cannot be considered taxonomy-aligned.

Stage 1: Eligibility Check

The first question is: Does your company's economic activity fall within the scope of the Taxonomy?

Commission Delegated Regulation 2021/2139 defines technical screening criteria for six environmental objectives. Economic activities listed in these criteria are considered taxonomy-eligible. Eligibility begins by matching activities to NACE codes.

What does eligibility mean? An activity being defined in the Taxonomy does not automatically mean it is sustainable. Eligibility merely indicates that the activity falls within the scope of assessment.

Practical example — Manufacturing: A steel producer has an activity defined as "Manufacture of iron and steel" (NACE C24.10) in the Delegated Regulation. This activity is taxonomy-eligible and can proceed to the next stage.

Practical example — Energy: A wind power plant has the activity "Electricity generation from wind power" (NACE D35.11). This is also a taxonomy-eligible activity.

Non-eligible example: An advertising agency's core activity (NACE M73) is not defined in the current Delegated Regulation and is not considered taxonomy-eligible.

Stage 2: Substantial Contribution

The eligible activity must demonstrate that it makes a substantial contribution to at least one of the 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
6. Protection and restoration of biodiversity and ecosystems

For each activity, the Delegated Regulation defines specific Technical Screening Criteria (TSC). These criteria include quantitative thresholds and qualitative conditions that must be met for the activity to be considered as making a "substantial contribution" to the relevant objective.

Practical example — Steel production and climate mitigation: The substantial contribution criterion for climate mitigation in steel production varies by production route:

• Primary steel production (BF-BOF): Below 1.331 tonnes CO2e per tonne of crude steel
• Electric arc furnace (EAF): Below 0.209 tonnes CO2e per tonne of crude steel (Commission Delegated Regulation 2021/2139, Annex I, Section 3.9)

Determining whether these thresholds are met requires facility-level measurement and calculation.

Practical example — Wind energy: Electricity generation from wind power is considered an activity that directly makes a substantial contribution to climate mitigation. No additional quantitative threshold is required, although a life-cycle emissions assessment may be requested.

Stage 3: Do No Significant Harm (DNSH)

Making a substantial contribution to one environmental objective is not sufficient — the activity must also not significantly harm any of the other five objectives. The DNSH principle is one of the fundamental building blocks of the Taxonomy (Regulation 2020/852, Article 17).

For each activity-objective combination, the Delegated Regulation defines separate DNSH criteria. These typically include:

• Quantitative thresholds: Specific pollutant emission limits
• Qualitative conditions: Environmental impact assessment completed, adaptation plan in place
• Legal compliance: Compliance with relevant EU directives (Water Framework Directive, Waste Framework Directive, etc.)

Practical example — Steel production DNSH check:

The DNSH assessment must be conducted separately for each environmental objective. Failure on even one objective prevents the activity from being considered aligned.

Stage 4: Minimum Safeguards

Beyond technical criteria, the activity must also comply with certain social and governance standards. Minimum safeguards require compliance in four key areas (Regulation 2020/852, Article 18):

1. OECD Guidelines for Multinational Enterprises: Human rights, environment, bribery, and consumer rights
2. UN Guiding Principles on Business and Human Rights: Human rights due diligence
3. ILO Core Conventions: Labor rights and fair working conditions
4. International Bill of Human Rights: Fundamental human rights

The Platform on Sustainable Finance published a detailed report on the application of minimum safeguards (Platform on Sustainable Finance, Final Report on Minimum Safeguards, October 2022). According to this report:

• The company must have a human rights due diligence process in place
• Tax compliance and aggressive tax planning must be assessed
• Fair competition compliance must be demonstrated
• Lobbying activities must be transparent

Stage 5: Reporting

Activities that successfully pass all five stages can be reported as taxonomy-aligned. At the reporting stage, three core KPIs are disclosed:

• Turnover ratio: The proportion of revenue from taxonomy-aligned activities relative to total revenue
• Capital expenditures ratio (CapEx): The proportion of capital expenditures related to taxonomy-aligned activities relative to total CapEx
• Operating expenditures ratio (OpEx): The proportion of specific operating expenditures related to taxonomy-aligned activities relative to total OpEx

Reporting must follow the templates defined in Commission Delegated Regulation 2021/2178.

Common Challenges in the Assessment Process

Data Collection

Technical screening criteria typically require detailed facility-level operational data. Multi-site companies may need to conduct separate assessments for each facility. Systematic collection of data on energy consumption, emissions, water use, and waste volumes is a prerequisite.

Managing Multiple Activities

Many companies carry out more than one economic activity. Each activity must be assessed individually, and some may qualify as aligned while others may not. Correct disaggregation of activities in reporting is critically important.

The DNSH Burden of Proof

DNSH assessment requires extensive environmental data and documentation, particularly for the water and biodiversity objectives. Many companies encounter challenges such as outdated Environmental Impact Assessment reports or undocumented compliance with EU directives.

Uncertainty in Minimum Safeguards

There is not yet full clarity on how minimum safeguards should be evidenced in practice. While the Platform on Sustainable Finance's guidance provides direction, adapting existing human rights and compliance processes to Taxonomy requirements takes time.

Step-by-Step Implementation Plan

A recommended approach for systematically conducting a Taxonomy alignment assessment:

Preparation (1-2 Months)

1. Map all of the company's economic activities to NACE codes
2. Check these activities against the definitions in the Delegated Regulation (eligibility screening)
3. List the relevant technical screening criteria for eligible activities
4. Identify data gaps and create a data collection plan

Assessment (2-4 Months)

5. Evaluate substantial contribution criteria for each eligible activity
6. Check DNSH criteria separately for each environmental objective
7. Review minimum safeguard requirements and document compliance status
8. Compile supporting evidence for each stage

Reporting (1-2 Months)

9. Calculate KPIs for taxonomy-aligned and eligible activities
10. Complete reporting templates
11. Share findings with internal stakeholders and obtain management approval
12. Include in external reporting

Key Clarifications from Commission FAQs

The European Commission has published numerous Frequently Asked Questions (FAQ) documents on Taxonomy implementation. Notable clarifications include:

• Transitional activities can also be taxonomy-aligned, but additional conditions apply
• Enabling activities, while not directly sustainable, can qualify as aligned by enabling the sustainability of other activities
• A complementary Delegated Regulation (2022/1214) established separate rules for nuclear energy and natural gas
• Taxonomy alignment is an assessment of specific economic activities, not a company's overall sustainability performance

(European Commission, FAQ on the EU Taxonomy, updated version 2024)

Conclusion

A Taxonomy alignment assessment is a process that demands technical depth and operational discipline. However, this process should be viewed not merely as a compliance obligation, but as an opportunity to systematically evaluate and improve a company's environmental performance. Companies that start early gain the opportunity to mature their data infrastructure and processes, which both improves reporting quality and facilitates access to sustainable finance.

Key Takeaway: Taxonomy alignment requires meeting all five sequential stages. Failure at any single stage prevents the activity from being considered aligned. Before starting the assessment, review your data infrastructure — identifying data gaps early is the most critical step in the entire process.