The Carbon Border Adjustment Mechanism (CBAM)
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In this article, we break down what the EU CBAM is, how it works, and what businesses need to do to comply.
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What is the EU Taxonomy?
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“ The EU Taxonomy is a landmark framework designed to guide sustainable investments and support the European Union's ambitious climate goals under the European Green Deal. ”
As the EU ramps up efforts to reduce GHG emissions, the Taxonomy provides a classification system for determining which economic activities can be considered environmentally sustainable. By offering clear criteria, it helps investors and businesses align their financial activities with sustainability targets, reducing greenwashing and promoting genuine progress toward a low-carbon economy.
In this article, we'll break down what the EU Taxonomy is, how it works, the criteria for sustainable activities, and its broader impact on businesses and financial markets.
What is the EU Taxonomy? An overview
The EU Taxonomy is a classification framework designed to identify and promote environmentally sustainable economic activities. It was introduced as part of the EU's sustainable finance strategy to ensure that capital flows are directed towards projects and businesses that contribute to the EU's climate and environmental objectives.
“ At its core, the EU Taxonomy provides a system for evaluating the environmental sustainability of economic activities, helping investors and companies align their financial strategies with global climate goals. ”
In early 2025, the European Commission adopted the Omnibus Simplification Regulation to make the framework more practical, streamlining reporting requirements, clarifying scope thresholds, and better aligning disclosures with other EU regulations like the CSRD. The Taxonomy remains legally binding for large companies and financial market participants, making it a key tool in driving corporate transparency and accountability in sustainability efforts.
What is the purpose of the EU Taxonomy?
The EU Taxonomy was developed to:
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Guide sustainable investment:
By providing a consistent framework, it ensures financial resources are allocated to genuinely sustainable projects rather than activities misleadingly marketed as 'green'.
By providing a consistent framework, it ensures financial resources are allocated to genuinely sustainable projects rather than activities misleadingly marketed as 'green'.
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Support the EU's climate goals:
The Taxonomy aligns with the European Green Deal and the EU's objective to become climate-neutral by 2050.
The Taxonomy aligns with the European Green Deal and the EU's objective to become climate-neutral by 2050.
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Prevent greenwashing:
It establishes clear, science-based criteria to determine which economic activities can be classified as sustainable, ensuring transparency in sustainability claims.
It establishes clear, science-based criteria to determine which economic activities can be classified as sustainable, ensuring transparency in sustainability claims.
The six environmental objectives
The EU Taxonomy is structured around six key environmental objectives, designed to cover the full spectrum of sustainability challenges:
Climate change mitigation
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Reducing greenhouse gas emissions and promoting low-carbon technologies.
Climate change adaptation
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Improving resilience to the impacts of climate change.
Sustainable water & marine use
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Preventing water pollution and promoting water efficiency.
Circular economy transition
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Encouraging resource efficiency, recycling, and waste reduction.
Pollution prevention
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Minimising harmful emissions and pollutants.
Biodiversity & ecosystem protection
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Preserving natural habitats and biodiversity.
For an activity to be considered sustainable under the EU Taxonomy, it must contribute substantially to at least one of these objectives while complying with strict environmental criteria.
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Criteria for sustainable activities
To determine whether an economic activity can be classified as sustainable under the EU Taxonomy, it must meet a set of four rigorous technical criteria.
These criteria ensure that activities contribute meaningfully to the EU's environmental goals while avoiding harm in other areas. The framework is designed to prevent greenwashing by providing a clear, science-based standard for sustainability.
The four criteria are:
🌱 Substantial contribution
An activity must make a substantial contribution to at least one of the six environmental objectives outlined in the EU Taxonomy. This means the activity should significantly advance climate or environmental goals, such as:
- Reducing carbon emissions through renewable energy projects.
- Improving energy efficiency in building design and renovations.
- Enhancing biodiversity through reforestation or conservation efforts.
The technical screening criteria specify thresholds for each objective, ensuring that the activity provides a measurable, positive environmental impact.
🚫 Do no significant harm (DNSH)
While contributing positively to one objective, the activity must also do no significant harm to the other five objectives. This requirement ensures that sustainability efforts in one area don't come at the expense of other environmental priorities.
For example:
- A wind energy project may reduce carbon emissions but could still be excluded if it disrupts protected biodiversity areas.
- Waste recycling facilities must manage emissions and pollutants effectively to avoid harming water quality.
As of 2025, the DNSH criteria have been simplified to reduce the reporting burden on companies. The European Commission, in response to stakeholder feedback, streamlined the indicators and removed overly complex or redundant requirements, particularly those difficult to assess or verify in practice.
These updates aim to maintain a holistic approach to sustainability while improving usability, consistency, and comparability across sectors.
⚖️ Minimum safeguards
In addition to environmental criteria, the EU Taxonomy requires compliance with minimum social and governance safeguards. These align with international standards like the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
Key requirements include:
- Respecting human rights and labour standards.
- Preventing corruption, bribery, and unethical business practices.
- Ensuring good corporate governance practices.
📋 Comply with the applicable technical screening criteria
An activity must also comply with the applicable technical screening criteria (TSC), which set science-based thresholds and performance metrics for each environmental objective. These criteria ensure activities meet measurable sustainability standards and avoid greenwashing.
For example:
- Renewable energy: Solar projects must meet efficiency thresholds and avoid harming biodiversity.
- Energy efficiency in buildings: New constructions must meet strict energy performance ratings.
In 2025, the EU launched a major review of the TSC to improve clarity, consistency, and usability across sectors. Updates include simplified metrics, clearer definitions, and streamlined DNSH indicators. The revision also introduced greater flexibility for partial alignment disclosures and a proposed materiality threshold, allowing companies to focus reporting on activities representing at least 10% of turnover, CapEx, or OpEx.
Why these criteria matter:
These criteria ensure a high standard of sustainability that goes beyond superficial environmental claims. They help to:
Enhance transparency by clearly defining what qualifies as sustainable.
Promote accountability among businesses and investors.
Encourage comprehensive sustainability efforts across dimensions.
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Implementation timeline and reporting requirements
The EU Taxonomy has been introduced through a phased approach, with gradual implementation to ensure businesses and financial institutions have time to adapt to the regulatory requirements. The focus has been on increasing transparency and standardising sustainability disclosures to prevent greenwashing while directing capital towards genuinely sustainable activities.
Phased implementation timeline
The EU Taxonomy's rollout has followed a structured timeline since its adoption:
June 2020: The EU Taxonomy Regulation was formally adopted as part of the European Green Deal and Sustainable Finance Action Plan.
January 2022: Reporting requirements for the first two environmental objectives — climate change mitigation and climate change adaptation — came into effect for large companies and financial market participants.
January 2024: Reporting obligations expanded to cover the remaining four environmental objectives (water, circular economy, pollution prevention, biodiversity).
January 2025: Full compliance expected for companies in scope, with enhanced disclosure requirements now subject to simplification measures under the 2025 Omnibus Regulation. Voluntary reporting options and partial alignment disclosures have been introduced to ease the transition.
Who needs to comply?
The EU Taxonomy primarily applies to companies and financial institutions in the scope of the Corporate Sustainability Reporting Directive (CSRD). However, the 2025 Omnibus Simplification Regulation introduced important clarifications and voluntary options:
👔 Large companies
Taxonomy reporting is mandatory for companies subject to the CSRD, which includes large undertakings meeting at least two of the following thresholds:
- More than 250 employees
- €50 million in annual turnover
- €25 million in total assets
Under the Omnibus Regulation, mandatory Taxonomy disclosures now only apply to those with more than 1,000 employees, although companies below this threshold are encouraged to report voluntarily.
💼 Financial market participants
Investors and asset managers marketing financial products in the EU must disclose the extent to which their portfolios align with EU Taxonomy criteria — particularly under the SFDR (Sustainable Finance Disclosure Regulation).
📈 Listed SMEs (phased approach)
Listed small and medium-sized enterprises will be phased into CSRD reporting obligations starting in 2026, with simplified sustainability disclosure standards.
Taxonomy reporting will remain voluntary for these entities during the initial phase.
📝 Voluntary reporters
Companies not currently in scope may choose to disclose partial alignment if the economic activity accounts for at least 10% of turnover, CapEx, or OpEx.
Reporting requirements
Companies subject to the EU Taxonomy must disclose how their activities align with the regulation using specific Key Performance Indicators (KPIs):
Turnover
The proportion of revenue generated from EU Taxonomy-aligned activities.
Reflects how much of a company’s business is already sustainable based on its revenue streams.
Capital Expenditures (CapEx)
Investment in assets or projects aligned with the Taxonomy's criteria.
Indicates how much a company is investing today in transitioning to sustainable business activities.
Operating Expenditures (OpEx)
Costs related to the maintenance and operation of Taxonomy-aligned assets or projects.
Covers ongoing spending to keep sustainable assets running or improve their performance.
Qualifying information
Companies must explain the basis of their calculations and assessment methodology.
Disclosures must clarify how alignment was determined, including data sources, estimates, and applied thresholds.
In 2025, the European Commission introduced simplified reporting templates, reducing the number of required data points by up to 70%. These revised templates are designed to better align with CSRD disclosure formats and ease the reporting burden.
How are companies expected to report?
Transparency & consistency
Reports must be standardised and aligned with the ESRS under the CSRD framework.
Standardised reporting improves comparability across companies and ensures alignment with EU sustainability goals.
Third-party verification
While not mandatory, third-party audits are encouraged to enhance credibility and avoid greenwashing.
Independent assurance helps build trust in disclosures and strengthens stakeholder confidence.
Digital reporting tools
The European Commission has developed digital tools to support accurate data collection and streamline compliance.
These tools reduce reporting burden, help standardise data inputs, and ensure timely EU-compliant submissions.
Consequences of non-compliance
Failure to comply with the EU Taxonomy reporting requirements can lead to:
Reputational risks, including accusations of greenwashing.
Difficulty in accessing sustainable finance and investment capital.
Potential regulatory penalties, particularly under the CSRD framework.
Recent developments and updates
The EU Taxonomy continues to evolve, with recent updates reflecting both the expansion of criteria and growing efforts to simplify reporting obligations. The latest changes aim to balance scientific rigour with practical implementation, political considerations, and stakeholder feedback from companies, investors, and regulators.
Expansion to all six environmental objectives
Initially, the EU Taxonomy focused on the first two objectives: climate change mitigation and climate change adaptation. However, as of January 2024, the Taxonomy now covers all six environmental objectives:
- Sustainable use and protection of water and marine resources.
- Transition to a circular economy.
- Pollution prevention and control.
- Protection and restoration of biodiversity and ecosystems.
This expansion requires businesses to assess their activities against more comprehensive sustainability criteria, broadening the scope of the regulation and increasing the complexity of compliance.
Inclusion of nuclear and gas energy
In a controversial move, the EU officially included nuclear energy and natural gas as Taxonomy-aligned activities under specific conditions starting in 2023. These additions sparked debate due to their environmental impact and the potential for misuse of the framework for greenwashing.
Key conditions for inclusion:
- Natural gas: Must replace more carbon-intensive energy sources like coal and meet strict emission limits (below 270g CO₂/kWh).
- Nuclear energy: Must comply with the latest safety standards and demonstrate proper waste management strategies.
While these additions aim to support Europe's energy transition, critics argue they weaken the Taxonomy's credibility by classifying transitional fuels as sustainable.
Technical screening criteria (TSC) updates
In 2025, the European Commission launched a comprehensive review of the Technical Screening Criteria to address complexity and improve clarity. These updates were developed in collaboration with the Platform on Sustainable Finance and include:
- Simplified and more clearly defined thresholds across all six objectives
- Streamlined Do No Significant Harm (DNSH) indicators
- Stricter and more actionable metrics for biodiversity, pollution, and circular economy practices
- Adjustments to accommodate transitional and enabling activities more effectively
The goal is to make the TSC easier to apply in practice while maintaining a high bar for environmental performance.
Omnibus Simplification Package (2025)
A key development in early 2025 was the adoption of the EU Omnibus Simplification Regulation, which introduced a range of reforms to make the Taxonomy more accessible, usable, and aligned with broader EU sustainability reporting rules.
Key changes include:
- Materiality threshold: Companies may now limit reporting to activities that represent at least 10% of turnover, CapEx, or OpEx.
- Streamlined templates: New reporting templates reduce required data points by up to 70%, easing the administrative burden.
- Scope clarification: Mandatory Taxonomy reporting now applies only to companies with more than 1,000 employees.
- Voluntary reporting options: Companies outside the mandatory scope can report partial alignment voluntarily.
- Alignment with CSRD: The updated reporting format is now more closely integrated with the CSRD and ESRS framework, promoting consistency across disclosures.
These updates aim to maintain the robustness of the framework while addressing widespread concerns about complexity and cost.
Market uptake and impact
The EU Taxonomy's influence continues to grow, with financial institutions increasingly using it to screen investment portfolios and design green financial products. However, many companies still face challenges in interpreting the complex technical requirements, especially in sectors without fully defined screening criteria.
- Clarifications on the EU Taxonomy: On November 29, 2024, the European Commission published a set of frequently asked questions (FAQs) to support stakeholders in implementing the EU Taxonomy. This initiative aims to simplify the framework and reduce the administrative burden on companies applying the sustainable finance guidelines.
- EU Omnibus Simplification Regulation: In early 2025, the EU introduced additional reforms to address these challenges, streamlining reporting templates, clarifying scope thresholds, and reducing the volume of required data points. These simplifications aim to make the Taxonomy more usable and scalable, particularly for companies that are not yet subject to mandatory CSRD reporting but want to demonstrate alignment voluntarily.
The next phase of the EU Taxonomy
Looking ahead, the European Commission plans to:
Refine definitions and thresholds for transitional and enabling activities. Clearer guidance will help businesses identify and report these activities more accurately under the Taxonomy framework.
Explore expanding the Taxonomy to include social sustainability factors. These may cover areas such as labour rights, supply chain due diligence, and local community impact — helping build a more holistic sustainability framework.
Roll out additional digital tools and platforms to streamline reporting and automate data inputs. The goal is to reduce administrative burden, increase data accuracy, and support scalable compliance across companies.
Continue aligning the Taxonomy with other EU sustainability regulations. Ongoing efforts will further integrate the Taxonomy with frameworks like the CSRD and CSDDD, creating a more coherent EU sustainability reporting landscape.
Challenges
While the EU Taxonomy is widely regarded as a landmark initiative for sustainable finance, its implementation has not been without challenges and criticism. Some of the key concerns relate to its complexity, political influence, and the practical difficulties faced by businesses trying to comply.
| Challenge | Description |
|---|---|
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Complexity and Interpretation
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The technical screening criteria are highly detailed and complex, making it difficult for companies, especially SMEs, to interpret and apply them consistently. This complexity often results in discrepancies in how businesses classify and report their sustainability efforts. |
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Data Availability and Verification
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Accurate sustainability reporting requires access to granular environmental performance data, which many companies struggle to collect. Smaller businesses often lack the resources to meet data demands, and there are limited standardised datasets available, increasing the risk of inconsistent reporting. |
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Inclusion of Nuclear and Gas Energy
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The inclusion of nuclear and natural gas under strict conditions has sparked significant criticism. While nuclear energy is low-carbon, concerns around radioactive waste management persist. Natural gas, although less polluting than coal, still emits substantial carbon, leading critics to argue its inclusion weakens the framework's climate integrity. |
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Greenwashing Risks
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Despite its rigorous criteria, the Taxonomy still leaves room for greenwashing. Companies may claim partial alignment even when only a small portion of their activities meet the sustainability requirements. The allowance for gas as a transitional fuel has also raised concerns that high-emission industries could continue under a “green” label. |
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Global Alignment and Interoperability
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While the EU Taxonomy sets a global benchmark, other regions (like the UK and China) are developing their own versions with varying thresholds and metrics. This fragmentation complicates cross-border investments and makes it harder for multinational corporations to ensure consistent sustainability reporting across regions. |
Future outlook for the EU Taxonomy
Following the adoption of the Omnibus Simplification Regulation in early 2025, the EU is now moving into the next phase of refining and operationalising its sustainable finance framework. The regulation brought in major simplifications to EU Taxonomy reporting - streamlined templates, clearer scope thresholds, and alignment with CSRD formats - all designed to reduce reporting burdens while preserving rigour.
These changes form part of a wider EU effort to simplify sustainability reporting across regulations, including the EU Taxonomy, CSRD, and CSDDD. This consolidation agenda was formally announced by Commission President Ursula von der Leyen in late 2024, responding to the Budapest Declaration's call to cut ESG reporting burdens by 25% by mid-2025.
Looking forward, the EU is expected to focus on:
Finalising updates to the Technical Screening Criteria (TSC) to improve clarity and sector coverage
Assessing stricter conditions and clearer safeguards for transitional activities such as nuclear and gas
Exploring a future Social Taxonomy, building on previous proposals to include labour rights, equity, and social justice dimensions
Rolling out digital reporting tools and platforms to automate data capture and ease compliance
Improving global alignment, particularly with ISSB standards, the SEC climate rule (if reinstated), and other international taxonomies
The focus has shifted from drafting new obligations to ensuring that the framework is workable at scale, coherent across regulations, and practical for businesses of all sizes.
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How Greenly can help your company
Greenly offers expert support to help businesses navigate sustainability challenges, including compliance with the EU Taxonomy and other regulatory frameworks. Our carbon management solutions are designed to streamline sustainability reporting and drive meaningful progress toward emissions reduction.
Our Services Include:
- Carbon Accounting and Reporting: Our platform helps companies measure, track, and disclose their carbon emissions, aligning with key sustainability standards.
- Life Cycle Assessments (LCAs): We provide detailed LCAs to assess the environmental impact of products and services across their entire life cycle.
- Supply Chain Sustainability: Greenly assists in identifying and working with sustainable suppliers to improve overall supply chain sustainability.
- Tailored Action Plans: Our experts support companies in the creation of customised decarbonisation strategies to help reduce emissions and align with global sustainability goals.
- Regulatory Support: Our tools and expertise support businesses in measuring and managing their carbon footprint, making sustainability reporting more transparent and effective.
By partnering with Greenly, companies can gain valuable insights into their sustainability performance, reduce emissions, and make informed decisions that contribute to a greener future. Get in touch with us today.
Sources
- European Commission, EU taxonomy for sustainable activities, https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en
- European Commission, FAQ: What is the EU Taxonomy and how will it work in practice?,https://finance.ec.europa.eu/system/files/2021-04/sustainable-finance-taxonomy-faq_en.pdf
- Envoria, The EU Taxonomy environmental objectives 1–6 explained, https://envoria.com/insights-news/the-eu-taxonomy-environmental-objectives-1-6-explained
- European Commission, EU Taxonomy Navigator, https://ec.europa.eu/sustainable-finance-taxonomy/
- EU Taxonomy Info, EU Taxonomy Timeline, https://eu-taxonomy.info/info/eu-taxonomy-timeline
- Envoria, What is the EU Taxonomy and which companies are required to report? https://envoria.com/insights-news/what-is-the-eu-taxonomy-and-which-companies-are-required-to-report
- Ecobio Manager, EU Taxonomy KPIs – the Key Performance Indicators of Sustainable Finance, https://ecobiomanager.com/eu-taxonomy-kpis-the-key-performance-indicators-of-sustainable-finance/
- EU Parliament, EU taxonomy: Delegated acts on climate, and nuclear and gas, https://www.europarl.europa.eu/RegData/etudes/BRIE/2022/698935/EPRS_BRI(2022)698935_EN.pdf
- European Commission, General Publications Frequently asked questions on the EU taxonomy, https://finance.ec.europa.eu/publications/frequently-asked-questions-eu-taxonomy_en
- Skadden, EU Seeks To Simplify ESG Reporting Obligations, https://www.skadden.com/insights/publications/2024/11/eu-seeks-to-simplify-esg-reporting-obligations
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