EU Taxonomy & EU Taxonomy Regulation: A Complete Guide for Companies in 2026

The EU Taxonomy provides a common language and framework to determine which economic activities qualify as environmentally sustainable and are in line with the European Green Deal objectives.

At its core, the EU Taxonomy is a framework that classifies which economic activities can be considered environmentally sustainable. It was established in 2020 through Regulation (EU) 2020/852 and is a central tool to guide capital flows towards sustainable investments and to increase transparency across markets.

One of the main purposes of the EU Taxonomy is to combat greenwashing, which can be defined as “a marketing tactic used to deceive people into believing an organization’s products, services or operations are more eco-friendly than reality” (IBM Sustainability). By providing measurable, science-based standards, the EU is tackling this problem and enabling companies, investors and banks to consistently assess sustainability performance. At the same time, the Taxonomy guides capital flows by directing investment and financing toward activities that are genuinely environmentally beneficial, ensuring that funding supports the transition to a sustainable, low-carbon economy.

The EU developed the Taxonomy to create a unified, science-based framework for sustainable finance across member states. Before its introduction, differing national definitions and voluntary reporting practices made it difficult for investors, regulators, and companies to assess environmental performance consistently. By establishing clear criteria, the Taxonomy supports the EU Green Deal objectives, promotes transparency, and ensures that economic activities contributing to climate and environmental goals are clearly identified and incentivized. It also helps align the financial sector with the EU’s long-term sustainability ambitions, providing a foundation for regulatory reporting and risk management.

The EU Taxonomy Regulation sets the legal framework and technical rules that determine how sustainable economic activities are defined and assessed across the EU.

Regulation 2020/852, the cornerstone of the EU Taxonomy, establishes the overarching criteria for determining whether an economic activity can be considered environmentally sustainable. Conceived as an investment tool, the regulation aims to create a science-based “green list” of activities that genuinely contribute to environmental objectives and facilitate sustainable capital allocation.

To translate these principles into practice, the European Commission supported by expert input from the Platform on Sustainable Finance (PSF) has adopted a series of Delegated Acts. These acts define detailed Technical Screening Criteria (TSC) for specific sectors and activities, setting measurable thresholds, performance metrics, and minimum safeguards. Together, the Regulation and its Delegated Acts form a legally enforceable framework that guides sustainable investment decisions and underpins EU sustainability reporting requirements.

The EU Taxonomy is closely linked to the European Green Deal, the EU’s strategy to achieve a climate-neutral economy by 2050. By defining what counts as a sustainable activity, the Taxonomy directs public and private capital toward low-carbon, environmentally beneficial projects. This alignment strengthens sustainable finance initiatives, helps companies integrate ESG considerations into investment and procurement decisions, and supports the EU’s broader policy goals of climate mitigation, adaptation, and circular economic growth.

The EU Taxonomy identifies six environmental objectives that economic activities must contribute to in order to be considered sustainable:

1. Climate Change Mitigation (CCM): activities that reduce greenhouse gas emissions or enhance carbon sinks.
2. Climate Change Adaptation (CCA): actions that improve resilience to climate-related impacts, protecting people, assets, and ecosystems.
3. Sustainable Use and Protection of Water and Marine Resources (WTR): ensuring efficient water use and safeguarding aquatic ecosystems.
4. Transition to a Circular Economy (CE): activities that promote resource efficiency, waste reduction, and material reuse.
5. Pollution Prevention and Control (PPC): reducing emissions to air, water, and soil, and limiting harmful environmental impacts.
6. Protection and Restoration of Biodiversity and Ecosystems (BIO): preserving habitats, promoting biodiversity, and preventing ecosystem degradation.

These objectives form the foundation of the Taxonomy’s classification system, ensuring that companies’ environmental contributions are measurable, consistent, and aligned with Europe’s sustainability ambitions.

For companies, the EU Taxonomy transforms sustainability from a high-level commitment into a measurable and reportable business requirement. It affects how organizations assess their activities, allocate capital, communicate sustainability performance, and meet regulatory expectations under CSRD and related EU frameworks.

EU Taxonomy reporting applies primarily to companies within the scope of the Corporate Sustainability Reporting Directive (CSRD). This includes large EU companies that meet at least two of the following criteria: more than 250 employees, over €50 million in net turnover, or more than €25 million in total assets. Listed SMEs are also included, with phased-in requirements and optional deferrals.

In addition, non-EU companies with significant operations in the EU must report if they generate more than €150 million in EU turnover and meet certain subsidiary or branch thresholds. Financial market participants, such as banks and asset managers, are also subject to Taxonomy disclosures for their investment and lending activities.

Taxonomy eligibility refers to whether an economic activity is covered by the EU Taxonomy at all. An activity is eligible if it falls within a sector and activity type defined in the Delegated Acts, regardless of its current environmental performance.

Taxonomy alignment, however, goes a step further. An eligible activity is only considered aligned if it:

1. Substantially contributes to at least one of the six environmental objectives mentioned above
2. Does no significant harm (DNSH) to the other environmental objectives
3. Complies with minimum social safeguards
4. Meets all applicable Technical Screening Criteria

As a result, many companies have eligible activities, but far fewer can demonstrate full Taxonomy alignment without detailed data and documentation.

Companies subject to EU Taxonomy reporting must disclose three key financial indicators, broken down into eligible and aligned shares:

1. Turnover: Net turnover refers to the income generated from selling goods and providing services, excluding value-added tax (VAT), sales rebates, and other taxes that are directly tied to sales.
2. Capital Expenditure (CapEx): Investments in assets or processes that are already aligned or are part of a credible transition plan toward alignment.
3. Operating Expenditure (OpEx): Direct operating costs related to the maintenance of aligned assets or processes, such as repairs, short-term leases, and R&D.
   

These KPIs connect sustainability performance directly with financial reporting, enabling investors and regulators to assess how “green” a company’s business model truly is.

The EU Taxonomy has been introduced in phases, with reporting requirements expanding over time:

From 1 January 2021: 

• Large public-interest entities began disclosing taxonomy eligibility for the first two environmental objectives, with reports published in 2022.

From 1 January 2022: 

• The same group of large public-interest entities expanded reporting to include taxonomy alignment for environmental objectives 1 and 2, with disclosures due in 2023.

From 1 January 2024: 

• Large public-interest entities were expected to report on all six environmental objectives, with reports due in 2025.

From 1 January 2025: 

• All large companies fall within scope, with first reports due in 2026.

From 1 January 2026: 

• Listed SMEs and other in-scope undertakings are required to report, with disclosures due in 2027; listed SMEs may opt out until 2028.
  

Draft: From 1 January 2028: 

• Non-EU companies generating more than €150 million in net EU turnover are expected to report, with first disclosures due in 2029.

This phased rollout gives companies time to build data processes but also increases expectations year over year, making early preparation a strategic advantage.

The CSRD introduces a phased rollout to give companies sufficient time to prepare for mandatory sustainability reporting. Large public-interest companies were the first to disclose taxonomy-related information, followed by all large companies, listed SMEs, and finally non-EU companies with significant EU turnover. Each phase specifies the type of data to report, the environmental objectives in scope, and the respective deadlines, allowing companies to gradually adapt their processes, internal controls, and reporting systems to meet EU sustainability standards.

Reporting under the EU Taxonomy Regulation requires companies to translate environmental objectives into measurable disclosures and demonstrate how their activities contribute to sustainability. A structured approach ensures that organizations can align with EU standards, provide accurate ESG data, and prepare for external assurance while avoiding common reporting pitfalls.

To report under the EU Taxonomy, companies generally follow a five-step process:

1. Identify relevant economic activities: map the company´s operations to the Taxonomy’s sectors.
2. Assess substantial contribution: determine which activities make a significant positive impact on one or more environmental objectives.
3. Check “Do No Significant Harm” (DNSH): ensure activities do not negatively affect other environmental objectives.
4. Verify minimum safeguards: confirm compliance with social and governance standards.
5. Collect and report data: gather financial and operational metrics to demonstrate eligibility and alignment, including revenue, CapEx, and OpEx percentages.

Following these steps helps organizations produce a structured, audit-ready disclosure that meets EU requirements.

An activity is considered sustainable under the EU Taxonomy if it meets three key criteria: 

1. it substantially contributes to one or more of the six environmental objectives
2. it does not cause significant harm to any of the others
3. it adheres to minimum social and governance safeguards. 

Sustainability is not based on perception; it requires measurable, science-based evidence of positive environmental impact, making data quality and transparency essential for reporting.

The “Do No Significant Harm” (DNSH) principle ensures that a taxonomy-aligned activity contributing to one environmental objective does not undermine others. For example, a renewable energy project reducing carbon emissions must also minimize water usage, prevent pollution, and protect biodiversity. 

In addition, companies must respect minimum safeguards, which include compliance with human rights, labor standards, and anti-corruption regulations. 

Together, DNSH and safeguards guarantee that sustainable activities are genuinely beneficial, socially responsible, and aligned with EU legal expectations.

The EU Taxonomy currently focuses on sectors that have the greatest potential to contribute to environmental objectives and climate transition. Reporting obligations apply to economic activities within these sectors, ensuring that companies provide transparent and standardized sustainability information.

The EU Taxonomy currently covers high-impact sectors such as: 

• Energy
• Manufacturing
• Transport
• Construction and real estate
• Water and waste management
• Forestry
• Information and communication technologies (ICT) 
• Financial and insurance activities 

Activities within these sectors are assessed for their contribution to environmental objectives such as climate mitigation, adaptation, and circular economy practices. Coverage is determined based on the activity’s potential environmental impact and relevance to the EU’s climate and sustainability goals.

The European Commission’s new Delegated Act, effective 1 January 2026, introduces simplified reporting templates, fewer data points, and streamlined “Do No Significant Harm” (DNSH) assessments. While these changes reduce some administrative burden, companies still face detailed data collection, KPI tracking, and compliance requirements across multiple environmental objectives, making structured processes and robust systems essential for accurate, audit-ready reporting.

The EU Taxonomy and CSRD reporting obligations primarily target large EU companies, but small and medium-sized enterprises (SMEs) and non-EU companies with significant EU operations are also impacted. Understanding the scope and timelines helps these organizations plan for voluntary reporting or upcoming mandatory requirements, ensuring alignment with sustainability standards and investor expectations.

While SMEs are generally exempt from mandatory EU Taxonomy reporting in the early phases, many are encouraged to adopt voluntary reporting to improve transparency and prepare for future compliance. Listed SMEs will eventually be required to report, though they can opt out until 2028. Voluntary reporting allows SMEs to demonstrate environmental responsibility, assess sustainability performance, and align business practices with the EU’s Green Deal objectives ahead of formal obligations.

Non-EU companies with significant EU operations, such as generating over €150 million in net turnover in the EU, will fall under the CSRD and EU Taxonomy reporting requirements starting from 2028. These companies must assess the taxonomy alignment of their EU-based activities, collect relevant ESG data, and disclose environmental performance according to EU standards. Early preparation ensures that subsidiaries’ data collection, internal controls, and reporting processes meet the stringent requirements set for in-scope organizations.

Aligning with the EU Taxonomy enables companies to demonstrate environmental responsibility, improve transparency, and integrate sustainability into business strategy. Beyond compliance, it offers financial and strategic advantages by guiding investment decisions, strengthening stakeholder confidence, and positioning organizations for long-term success in a low-carbon economy.

Companies that align with the EU Taxonomy can more easily access sustainable financing instruments, such as green bonds or sustainability-linked loans. By clearly demonstrating which activities are environmentally sustainable, organizations reduce perceived investment risk and may benefit from lower borrowing costs, improved financing terms, and enhanced credibility with lenders and financial institutions.

Taxonomy-aligned reporting provides investors and banks with clear, comparable, and verifiable information on environmental performance. This transparency increases investor confidence and facilitates engagement with ESG-focused capital providers. Companies that comply with EU sustainability standards are better positioned to attract long-term, sustainability-minded investment and demonstrate alignment with global ESG expectations.

Early alignment with the EU Taxonomy helps companies differentiate themselves in the market. By proactively integrating sustainable practices, businesses can improve operational efficiency, anticipate regulatory changes, and strengthen their reputation among customers, partners, and regulators. This forward-looking approach enables organizations to capture emerging market opportunities, mitigate environmental risks, and maintain a leadership position in the transition to a sustainable economy.

Implementing EU Taxonomy reporting can be complex due to detailed technical criteria, extensive data requirements, and evolving regulatory expectations. Understanding the common challenges and adopting structured processes can help companies navigate compliance efficiently and turn reporting obligations into strategic opportunities.

The Technical Screening Criteria (TSC) provide detailed thresholds, metrics, and minimum safeguards to determine whether an activity is taxonomy-aligned. Interpreting these criteria requires sector-specific knowledge and careful analysis to ensure that economic activities are accurately classified. Misinterpretation can lead to reporting errors, misaligned investments, or missed opportunities for sustainable financing.

EU Taxonomy reporting demands comprehensive data across turnover, CapEx, and OpEx, as well as environmental performance indicators. Collecting, validating, and consolidating this information from multiple departments and subsidiaries can be resource-intensive. Establishing standardized processes and leveraging centralized tools is crucial for ensuring accuracy, audit readiness, and consistent reporting.

The EU Taxonomy is continuously evolving, with updates to environmental objectives, technical criteria, and reporting expectations. Companies must monitor these changes, adapt internal processes, and adjust disclosures to remain compliant. Staying informed ensures that sustainability reporting reflects the latest regulatory requirements and industry best practices.

Adopting EU Taxonomy-aligned reporting early provides a strategic advantage. Organizations that implement robust processes and advanced technology can streamline compliance, reduce carbon-related risk, and turn environmental data into a strategic asset with measurable operational and financial impact. Early preparation also allows companies to identify emission hotspots, optimize sustainability performance, and align capital and resources with low-carbon, environmentally beneficial activities.

carbmee EIS™ supports this transformation by providing an AI-native, end-to-end environmental intelligence system. The platform connects products, sites, and suppliers to operational transactions, enabling full Scope 1, 2, and 3 carbon management and audit-ready compliance for CBAM, CSRD, and EUDR. It centralizes ESG data, automates data collection across departments and supply chains, integrates environmental KPIs beyond carbon, and offers customizable dashboards for enterprise-wide collaboration. With scenario modeling, decarbonization pathways, and actionable insights, carbmee EIS™ turns complex sustainability data into a clear strategy, helping companies act with confidence and maintain a competitive edge in a rapidly evolving regulatory landscape.

The EU Taxonomy is a classification system that defines which economic activities are considered environmentally sustainable under EU law.

The regulation aims to channel capital toward genuinely sustainable activities, enhance transparency for investors and companies, and combat greenwashing in the market.

The six environmental objectives of the EU Taxonomy are:

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

Companies must disclose the share of their turnover, capital expenditure (CapEx), and operating expenditure (OpEx) linked to taxonomy-aligned activities.

By setting clear, science-based criteria, the Taxonomy ensures that sustainability claims are verifiable, making it more difficult for companies to misrepresent their environmental performance.