Key Takeaways
- An activity qualifies as taxonomy-aligned only if it meets both the substantial contribution test and the DNSH test across all remaining environmental objectives.
- Article 17 defines six environmental objectives: climate mitigation, climate adaptation, water and marine resources, circular economy, pollution prevention, and biodiversity.
- The January 2026 simplification delegated act reduced DNSH chemical-related criteria for solar panel and battery manufacturing activities.
- Failure to document the DNSH assessment for each claimed activity renders the entire taxonomy-alignment disclosure unsupportable.
What is DNSH (Do No Significant Harm)?
We've seen entities report a taxonomy-aligned CapEx ratio of 40% or higher, only to have it collapse to near zero once someone actually checks whether each activity passes the DNSH test. The AFME/Oliver Wyman December 2024 review confirmed the pattern: preparers routinely run the substantial contribution assessment and then treat DNSH as an afterthought, or skip it entirely.
The EU Taxonomy sets a two-gate test for labelling an economic activity as environmentally sustainable. The first gate is substantial contribution: the activity must make a material positive contribution to at least one of the six environmental objectives listed in Articles 10 through 15 of Regulation 2020/852. The second gate is DNSH. Article 17 defines what constitutes significant harm to each of the remaining five objectives. For climate mitigation, significant harm means the activity leads to significant greenhouse gas emissions. For water and marine resources, it means the activity is detrimental to the good status of water bodies or marine environments. The remaining objectives (circular economy, pollution prevention, biodiversity, and climate adaptation) follow the same logic, each with its own threshold.
Climate Delegated Act (EU) 2021/2139 translates these principles into sector-specific technical screening criteria (TSC). For each economic activity listed in Annex I, the delegated act specifies both the substantial contribution criteria and the DNSH criteria for the remaining objectives. A manufacturing activity that contributes to climate mitigation, for example, must simultaneously demonstrate it does not harm water resources by complying with the relevant Water Framework Directive thresholds. DNSH is assessed at the individual activity level, not at the entity level. Under the CSRD, entities must disclose the proportion of turnover, capital expenditure, and operating expenditure that is taxonomy-aligned, which means the DNSH assessment feeds directly into the sustainability statement.
A simplification delegated act published in the Official Journal on 8 January 2026 eased specific DNSH criteria for chemicals. It removed the requirement to screen for self-classified substances under the CLP Regulation and clarified exemptions for hazardous substances in electrical and electronic equipment. A systematic review of all DNSH TSC is also underway, with the stated aim of making them simpler and more aligned with existing EU legislation.
Worked example: Rossi Alimentari S.p.A.
Client: Italian food production company, FY 2025, revenue €67M, IFRS reporter. Rossi operates two processing plants in Emilia-Romagna and claims taxonomy alignment for its investment in a new refrigeration system that reduces energy consumption by 35%.
Step 1: identify the economic activity and the substantial contribution claim
Rossi's refrigeration upgrade falls under Climate Delegated Act activity 3.5 (manufacture of energy-efficiency equipment for buildings). Capital expenditure is €2.8M. Management confirms the activity meets the substantial contribution threshold for climate mitigation by demonstrating at least a 30% improvement in energy efficiency relative to the baseline.
Documentation note: record the activity classification under Annex I, the baseline energy consumption of the replaced system, the projected consumption of the new system, and the calculation showing a 35% reduction. Cross-reference to the TSC for activity 3.5.
Step 2: assess DNSH for climate adaptation
Rossi performs a physical climate risk assessment for both plant locations, covering chronic risks (rising temperatures affecting cold-chain reliability) and acute risks (flood exposure in the Po Valley). Moderate flood risk is identified at one site, and management documents the existing mitigation measures (raised loading docks, flood barriers installed in 2023).
Documentation note: record the climate risk screening methodology, the data sources used (IPCC scenario RCP 8.5, regional flood maps), the adaptation measures in place, and the residual risk conclusion. Reference Annex I DNSH criteria for climate adaptation.
Step 3: assess DNSH for water, circular economy, pollution, and biodiversity
Rossi's new refrigeration system uses a natural refrigerant (CO2-based) with zero ozone depletion potential, satisfying the pollution prevention criteria. Water consumption is unchanged because the system is air-cooled. Circular economy compliance is documented through the manufacturer's end-of-life recycling commitment. Biodiversity is not directly affected because the installation occurs within an existing facility.
Documentation note: for each of the four remaining objectives, record the specific DNSH criterion from Annex I, the evidence gathered (refrigerant specification sheet, manufacturer recycling certificate, water usage data from facility management, site plan confirming no greenfield development), and the conclusion reached.
Step 4: calculate the taxonomy-aligned CapEx ratio
Both gates are cleared: the €2.8M investment passes the substantial contribution test and all five DNSH criteria. Rossi's total capital expenditure for FY 2025 is €9.1M, producing a taxonomy-aligned CapEx ratio of 30.8% (€2.8M / €9.1M).
Documentation note: record the numerator (€2.8M, the qualifying CapEx) and the denominator (€9.1M, total CapEx per IAS 16 and IFRS 16 additions). Cross-reference to the double materiality assessment to confirm that climate change was identified as a material topic under ESRS E1.
Rossi's taxonomy-aligned CapEx disclosure of 30.8% is defensible because the DNSH assessment covers all five remaining objectives at the individual activity level, with traceable evidence for each criterion.
Why it matters in practice
- At firms like ours, we've seen the DNSH assessment performed at entity level rather than at individual activity level on about half the sustainability engagements we review. Article 3(b) of Regulation 2020/852 requires the assessment at the economic activity level. Aggregating across activities obscures whether a specific activity harms a specific objective, and it makes the resulting taxonomy-alignment ratio unreliable.
- Teams often treat the DNSH test as a tick box exercise without retaining the underlying evidence. The TSC in the Climate Delegated Act reference specific EU directives (the Water Framework Directive, the Waste Framework Directive, REACH, and the EU Biodiversity Strategy) and require compliance with quantitative thresholds defined in those directives. An assertion of "no significant harm" without documented linkage to the relevant directive threshold gives the assurance provider no basis for verification. The file should tell a story: if a reviewer cannot trace from the claimed alignment back to the specific TSC threshold and the evidence supporting it, the conclusion is not documented at all.
- Honestly, the frustrating part is that the DNSH criteria are not ambiguous. They reference existing directives with defined limits. Sustainability teams treat them as a formality, and audit teams accept that treatment because the taxonomy framework is still unfamiliar territory for most engagement partners.
- In our experience, the January 2026 simplification delegated act will reduce DNSH documentation effort for chemicals-related criteria, but it does not change the fundamental requirement: each activity still needs its own assessment against each remaining objective. Teams that wait for "further simplification" before building proper DNSH procedures are accumulating risk on every reporting period in between.
DNSH vs. minimum safeguards
| Dimension | DNSH | Minimum safeguards |
|---|---|---|
| What it tests | Environmental harm to the five non-target objectives | Social and governance compliance (human rights, anti-corruption, fair competition, taxation) |
| Legal basis | Article 17, Regulation 2020/852 | Article 18, Regulation 2020/852 |
| Assessment level | Individual economic activity | Entity level |
| Criteria source | Technical screening criteria in the Climate and Environmental Delegated Acts | OECD Guidelines for Multinational Enterprises, UN Guiding Principles on Business and Human Rights, ILO core conventions |
| Failure consequence | The specific activity cannot be reported as taxonomy-aligned | No activity of the entity can be reported as taxonomy-aligned |
On engagements, this distinction matters because a minimum safeguards failure at entity level disqualifies every activity the entity would otherwise report as aligned, while a DNSH failure affects only the specific activity that fails the test. Auditors who check DNSH at activity level but skip the entity-level minimum safeguards assessment leave a gap that invalidates the entire taxonomy-alignment disclosure.
Related terms
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Frequently asked questions
How do I document a DNSH assessment?
For each economic activity claimed as taxonomy-aligned, record the five remaining environmental objectives, the specific DNSH technical screening criterion from the applicable delegated act annex, the evidence gathered (permits, test reports, supplier certifications, risk assessments), and the conclusion for each objective. Regulation 2020/852 Article 18 also requires compliance with minimum safeguards, which must be documented separately.
Does DNSH apply to taxonomy-eligible activities that are not taxonomy-aligned?
No. The DNSH test applies only when an entity claims an activity is taxonomy-aligned. Taxonomy-eligible activities (those listed in the delegated acts but not yet assessed against the technical screening criteria) require disclosure of eligibility but do not trigger the DNSH assessment. The distinction matters because reporting an activity as eligible does not require the same level of evidence as reporting it as aligned.
What changed in the January 2026 simplification delegated act?
The Commission's delegated act published 8 January 2026 simplified DNSH criteria for chemicals, removing the obligation to screen for self-classified substances under the CLP Regulation and clarifying exemptions for hazardous substances in electrical equipment. It also cut the general reporting template by 64% of data points for non-financial companies. The revised rules apply from 1 January 2026 covering FY 2025, though entities may still apply the previous regime for that year.