Definitions & Terminology
EU Taxonomy explained: environmental objectives, eligible vs. non-eligible activities, alignment criteria, and required key performance indicators (turnover, CAPEX, OPEX) for company disclosures.
Introduction to EU Taxonomy
What is the EU Taxonomy?
The EU Taxonomy is the European Union’s official classification system for economic activities. Think of it as a dictionary that defines what counts as environmentally sustainable economic activity.
Its purpose is simple: to create a common language that allows companies, investors, and policymakers to assess environmental performance in the same way.
Why does this matter?
Without such a framework, each company could define “green” in its own way, making it impossible to compare results. The EU Taxonomy closes this gap by setting clear rules for:
Which activities can be considered sustainable.
What criteria they must meet.
How results must be disclosed.
From 2022 onward, large EU companies and financial institutions are legally required to check their activities against the Taxonomy and publish the results. This improves transparency and helps channel investments toward activities that truly support Europe’s climate and environmental goals.
The Environmental Objectives
The EU Taxonomy is built around six environmental objectives:
Climate change mitigation (CCM)
Climate change adaptation (CCA)
Sustainable use and protection of water and marine resources (WTR)
Transition to a circular economy (CE)
Pollution prevention and control (PPC)
Protection and restoration of biodiversity and ecosystems (BIO)
For each objective, the European Commission has published a list of economic activities that may contribute substantially to it. Each listed activity comes with defined that set the conditions it must meet for contribution.
When reporting under the EU Taxonomy, companies must first check whether their activities appear in one of these official lists.
How Activities Are Classified
To understand the classification system better, let us look at the schematic diagram depicted below:
As illustrated above, the EU Taxonomy classifies economic activities into two broad categories:
Taxonomy-eligible activities (A)
Activities that are explicitly listed in the EU Taxonomy Regulation as potentially contributing to at least one environmental objective.
Eligibility means the activity is in scope and has defined , but it may or may not meet those criteria.
Eligible activities can therefore be classified as either aligned (meeting all criteria) or not aligned (failing one or more criteria).
Taxonomy-eligible and aligned activities (A1)
Activities that are listed in the Taxonomy and meet all the conditions:
These activities are considered “sustainable".
Taxonomy-eligible but not aligned activities (A2)
Activities that are listed in the Taxonomy but fail one or more conditions.
For example, a renewable energy project that harms biodiversity may be eligible but not aligned.
Taxonomy non-eligible activities (B)
These are activities not yet listed in the Taxonomy.
Non-eligible does not mean unsustainable. It only means the activity is not currently defined under the regulation.
In short:
Eligible = on the list
Aligned = on the list and meets all criteria
Non-Eligible = not on the list.
Key Performance Indicators (KPIs)
Once activities are classified, companies must report how much of their business falls into each bucket using three mandatory Key Performance Indicators (KPIs):
Revenue/Turnover – Proportion of revenue from eligible, aligned, or non-eligible activities (in other words, what share of sales comes from eligible or aligned activities).
Capital Expenditure (CAPEX) – proportion of CAPEX related to eligible, aligned, or non-eligible activities (how much investment goes into eligible or aligned activities).
Operational Expenditure (OPEX) – proportion of OPEX related to eligible, aligned, or non-eligible activities (how much day-to-day spending supports eligible or aligned activities).
These KPIs convert the classification into measurable, comparable numbers making disclosures easier to compare across firms and over time.
How the EU Taxonomy Works
The Taxonomy uses a step-by-step approach to classify economic activities:
Identify Eligible Activities within KPIs
Companies begin by reviewing their turnover, capital expenditure (CAPEX), and operating expenditure (OPEX) to see which activities appear on the official EU Taxonomy lists linked to the six environmental objectives.
If an activity is listed, it is taxonomy-eligible (A).
If not listed, it is taxonomy non-eligible (B).
Example: A power utility earns $100 million in revenue. $30 million comes from renewable wind farms (an activity listed in the Taxonomy), while $70 million comes from coal power plants (not listed). In this case:
$30 million of turnover is classified as eligible.
$70 million of turnover is classified as non-eligible.
Assess Alignment
Eligible activities are then tested against three conditions:
Meet the technical screening criteria (TSC),
Do no significant harm (DNSH) to other objectives, and
Comply with minimum social safeguards (MSS).
Activities that satisfy all three are considered taxonomy-aligned (A1), while those that fail one or more are considered taxonomy-eligible but not aligned (A2).
Determine Substantial Contribution to Environmental Objectives
Once activities are classified as aligned (A1) or not aligned (A2), companies must indicate which environmental objective(s) they contribute to.
For aligned activities (A1), this step is mandatory. Each activity is mapped to the objective(s) defined for it in the EU Taxonomy Delegated Acts.
For eligible but not aligned activities (A2), reporting the contribution is optional. Still, many companies disclose it to give a fuller picture of their business model.
The contribution is expressed through the same KPIs (turnover, CAPEX, and OPEX) showing not just whether an activity is aligned, but also what type of environmental goal it supports.
Example: Suppose a renewable energy project (e.g., wind power generation) contributes to both Climate change mitigation (CCM) and Climate change adaptation (CCA), but only meets alignment criteria for CCM. If the project generates $30 million in turnover, then the contribution is reported with qualitative tags as follows:
CCM = Yes → taxonomy-aligned, with $30m turnover reported as aligned.
CCA = No → activity is eligible for adaptation but not aligned (failed DNSH).
WTR, CE, PPC, BIO = Not eligible → the activity does not apply to these objectives.